FRANKLIN COVEY CO - Quarter Report: 2005 May (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
(Mark
One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the
quarterly period ended May 28, 2005
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the
transition period from __________ to __________
Commission
file no. 1-11107
FRANKLIN
COVEY CO.
(Exact
name of registrant as specified in its charter)
|
Utah
(State
of Incorporation)
|
87-0401551
(I.R.S.
employer identification number
|
|
2200
West Parkway Boulevard
Salt
Lake City, Utah
(Address
of principal executive offices)
|
84119-2099
(Zip
Code)
|
|
Registrant's
telephone number,
Including
area code
|
(801)
817-1776
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
|
Yes
|
x
|
|
|
No
|
o
|
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
|
Yes
|
|
o
|
|
No
|
x
|
Indicate
the number of shares outstanding of each of the issuer’s classes of Common Stock
as of the latest practicable date:
20,141,213
shares of Common Stock as of July 5, 2005
PART
I.
FINANCIAL INFORMATION
FRANKLIN
COVEY CO.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except per share amounts)
|
May
28,
2005
|
August
31,
2004
|
||||||
|
|
(unaudited)
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash,
cash equivalents, and short-term investments
|
$
|
45,453
|
$
|
41,904
|
|||
|
Accounts
receivable, less allowance for doubtful accounts
of $1,553 and $1,034
|
24,925
|
18,636
|
|||||
|
Inventories
|
21,508
|
23,693
|
|||||
|
Other
current assets
|
5,249
|
5,794
|
|||||
|
Total
current assets
|
97,135
|
90,027
|
|||||
|
Property
and equipment, net
|
35,498
|
40,584
|
|||||
|
Intangible
assets, net
|
84,388
|
87,507
|
|||||
|
Other
long-term assets
|
8,941
|
7,593
|
|||||
|
$
|
225,962
|
$
|
225,711
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of long-term debt
|
$
|
120
|
$
|
120
|
|||
|
Accounts
payable
|
9,345
|
14,018
|
|||||
|
Income
taxes payable
|
4,314
|
5,903
|
|||||
|
Accrued
liabilities
|
35,506
|
36,158
|
|||||
|
Total
current liabilities
|
49,285
|
56,199
|
|||||
|
Long-term
debt, less current portion
|
1,299
|
1,350
|
|||||
|
Other
liabilities
|
2,033
|
1,550
|
|||||
|
Total
liabilities
|
52,617
|
59,099
|
|||||
|
Shareholders’
equity:
|
|||||||
|
Preferred
stock - Series A, no par value; 4,000 shares authorized, 3,494
issued;
liquidation
preference totaling $89,529
|
87,345
|
||||||
|
Preferred
stock - Series A, no par value; convertible into common stock
at $14 per share;
4,000
shares authorized, 3,494 shares issued; liquidation
preference totaling $89,530;
recapitalized
in 2005 (Note 7)
|
87,203
|
||||||
|
Common
stock - $0.05 par value; 40,000 shares authorized, 27,056
shares issued
|
1,353
|
1,353
|
|||||
|
Additional
paid-in capital
|
192,148
|
205,585
|
|||||
|
Common
stock warrants
|
7,611
|
||||||
|
Accumulated
deficit
|
(4,871
|
)
|
(8,798
|
)
|
|||
|
Deferred
compensation on restricted stock grants
|
(723
|
)
|
(732
|
)
|
|||
|
Accumulated
other comprehensive income
|
656
|
1,026
|
|||||
|
Treasury
stock at cost, 6,517 and 7,028 shares
|
(110,174
|
)
|
(119,025
|
)
|
|||
|
Total
shareholders’ equity
|
173,345
|
166,612
|
|||||
|
$
|
225,962
|
$
|
225,711
|
||||
See
notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||
|
Net
sales:
|
|||||||||||||
|
Products
|
$
|
35,217
|
$
|
35,031
|
$
|
134,443
|
$
|
143,815
|
|||||
|
Training
and services
|
30,571
|
26,217
|
82,972
|
71,178
|
|||||||||
|
65,788
|
61,248
|
217,415
|
214,993
|
||||||||||
|
Cost
of sales:
|
|||||||||||||
|
Products
|
17,056
|
18,741
|
61,873
|
70,303
|
|||||||||
|
Training
and services
|
10,612
|
9,846
|
26,198
|
24,879
|
|||||||||
|
27,668
|
28,587
|
88,071
|
95,182
|
||||||||||
|
Gross
margin
|
38,120
|
32,661
|
129,344
|
119,811
|
|||||||||
|
Selling,
general, and administrative
|
35,947
|
35,128
|
110,388
|
114,553
|
|||||||||
|
Gain
on disposal of investment in
unconsolidated
subsidiary
|
(500
|
)
|
(500
|
)
|
|||||||||
|
Depreciation
|
1,848
|
2,509
|
6,346
|
9,322
|
|||||||||
|
Amortization
|
1,043
|
1,043
|
3,130
|
3,130
|
|||||||||
|
Income
(loss) from operations
|
(218
|
)
|
(6,019
|
)
|
9,980
|
(7,194
|
)
|
||||||
|
Interest
income
|
310
|
85
|
592
|
313
|
|||||||||
|
Interest
expense
|
(29
|
)
|
(27
|
)
|
(95
|
)
|
(195
|
)
|
|||||
|
Income
(loss) before provision for
income
taxes
|
63
|
(5,961
|
)
|
10,477
|
(7,076
|
)
|
|||||||
|
Benefit
(provision) for income taxes
|
3,006
|
812
|
1,203
|
(1,021
|
)
|
||||||||
|
Net
income (loss)
|
3,069
|
(5,149
|
)
|
11,680
|
(8,097
|
)
|
|||||||
|
Preferred
stock dividends
|
(2,184
|
)
|
(2,184
|
)
|
(6,551
|
)
|
(6,551
|
)
|
|||||
|
Loss
on recapitalization of preferred stock
|
(7,753
|
)
|
(7,753
|
)
|
|||||||||
|
Net
loss attributable to common
shareholders
|
$
|
(6,868
|
)
|
$
|
(7,333
|
)
|
$
|
(2,624
|
)
|
$
|
(14,648
|
)
|
|
|
Net
loss attributable to common
shareholders
per share:
|
|||||||||||||
|
Basic
and diluted (Note
11)
|
$
|
(.34
|
)
|
$
|
(.37
|
)
|
$
|
(.18
|
)
|
$
|
(.73
|
)
|
|
|
Weighted
average number of
common
shares:
|
|||||||||||||
|
Basic
and diluted
|
19,922
|
19,940
|
19,847
|
19,947
|
|||||||||
See
notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
Three
Quarters Ended
|
|||||||
|
May
28,
2005
|
May
29,
2004
|
||||||
|
(unaudited)
|
|||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income (loss)
|
$
|
11,680
|
$
|
(8,097
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash
provided
by operating
activities:
|
|||||||
|
Depreciation
and amortization
|
11,047
|
13,764
|
|||||
|
Loss
(gain) on disposal of assets
|
35
|
(29
|
)
|
||||
|
Restructuring
cost reversal
|
(306
|
)
|
|||||
|
Amortization
of deferred compensation
|
729
|
55
|
|||||
|
Gain
on disposal of investment in unconsolidated subsidiary
|
(500
|
)
|
|||||
|
Compensation
related to CEO common stock grant
|
404
|
||||||
|
Changes
in assets and liabilities:
|
|||||||
|
Decrease
(increase) in accounts receivable, net
|
(6,095
|
)
|
1,295
|
||||
|
Decrease
in inventories
|
2,253
|
14,152
|
|||||
|
Decrease
(increase) in other assets
|
(742
|
)
|
4,656
|
||||
|
Decrease
in accounts payable, outsourcing contract costs
payable,
and accrued liabilities
|
(5,450
|
)
|
(23,436
|
)
|
|||
|
Increase
(decrease) in other long-term liabilities
|
470
|
(161
|
)
|
||||
|
Decrease
in income taxes payable
|
(1,547
|
)
|
(105
|
)
|
|||
|
Net
cash provided by operating activities
|
11,978
|
2,094
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Purchases
of property and equipment
|
(2,671
|
)
|
(2,418
|
)
|
|||
|
Purchases
of short-term investments
|
(10,653
|
)
|
(13,430
|
)
|
|||
|
Sales
of short-term investments
|
21,383
|
6,000
|
|||||
|
Proceeds
from sale of investment in unconsolidated subsidiary
|
500
|
||||||
|
Proceeds
from sale of property and equipment
|
1,554
|
||||||
|
Net
cash provided by (used for) investing activities
|
8,559
|
(8,294
|
)
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Principal
payments on long-term debt
|
(87
|
)
|
(73
|
)
|
|||
|
Proceeds
from sales of common stock from treasury
|
35
|
120
|
|||||
|
Purchase
of treasury shares
|
(22
|
)
|
(129
|
)
|
|||
|
Proceeds
from management stock loan payments
|
840
|
||||||
|
Payment
of preferred stock dividends
|
(6,551
|
)
|
(6,551
|
)
|
|||
|
Net
cash used for financing activities
|
(5,785
|
)
|
(6,633
|
)
|
|||
|
Effect
of foreign exchange rates on cash and cash equivalents
|
(473
|
)
|
45
|
||||
|
Net
increase (decrease) in cash and cash equivalents
|
14,279
|
(12,788
|
)
|
||||
|
Cash
and cash equivalents at beginning of the period
|
31,174
|
41,916
|
|||||
|
Cash
and cash equivalents at end of the period
|
$
|
45,453
|
$
|
29,128
|
|||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Cash
paid for interest
|
$
|
79
|
$
|
252
|
|||
|
Cash
paid for income taxes
|
$
|
770
|
$
|
474
|
|||
|
Non-cash
investing and financing activities:
|
|||||||
|
Accrued
preferred stock dividends
|
$
|
2,184
|
$
|
2,184
|
|||
|
Issuance
of restricted common stock awards
|
$
|
720
|
$
|
829
|
|||
|
Loss
on recapitalization of preferred stock
|
$
|
(7,753
|
)
|
||||
See
notes
to condensed consolidated financial statements.
FRANKLIN
COVEY CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1 - BASIS OF PRESENTATION
Franklin
Covey Co. (the Company) provides integrated consulting, training, and
performance enhancement solutions to organizations and individuals in
productivity, leadership, strategy execution, sales force effectiveness,
effective communications, and other areas. Each integrated solution may include
components of training and consulting, assessment, and other application tools
that are generally available in paper-based or electronic formats. The Company’s
products and services are available through professional consulting services,
public workshops, retail stores, catalogs, and the Internet at www.franklincovey.com.
The
Company’s historically best-known offerings include the FranklinCovey
PlannerTM,
courses
based on the best-selling book, The
Seven Habits of Highly Effective People,
and the
productivity workshop entitled, “Focus: Achieving Your Highest Priorities.” The
Company’s latest offerings include facilitated work sessions, a course entitled
“The 4 Disciplines of Execution”, and its assessment tool, “xQ” (Execution
Quotient).
The
accompanying unaudited condensed consolidated financial statements reflect,
in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results
of
operations of the Company as of the dates and for the periods indicated. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to Securities
and Exchange Commission (SEC) rules and regulations. The information included
in
this quarterly report on Form 10-Q should be read in conjunction with the
financial statements and related notes included in the Company’s Annual Report
on Form 10-K for the fiscal year ended August 31, 2004.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
dates
of the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
The
Company utilizes a modified 52/53-week fiscal year that ends on August 31 of
each year. Corresponding quarterly periods generally consist of 13-week periods
that ended on November 27, 2004, February 26, 2005, and May 28, 2005 during
fiscal 2005. Under the modified 52/53-week fiscal year, the quarter ended May
28, 2005 had the same number of business days as the quarter ended May 29,
2004.
However, the three quarters ended May 28, 2005 had two fewer business days
than
the three quarters ended May 29, 2004.
The
results of operations for the quarter ended May 28, 2005 are not necessarily
indicative of results expected for the entire fiscal year ending August 31,
2005.
Certain
reclassifications have been made to the fiscal 2004 financial statements to
conform with the current period presentation, including $10.7 million of cash
equivalents at August 31, 2004 that were reclassified to short-term investments
in order to conform to the fiscal 2005 financial statement
presentation.
NOTE
2 - ACCOUNTING FOR STOCK-BASED
COMPENSATION
The
Company accounts for its stock-based compensation and awards using the
intrinsic-value method of accounting as outlined in Accounting Principles Board
(APB) Opinion 25 and related interpretations. Under the intrinsic-value
methodology, no compensation expense is recognized for stock option awards
granted at, or above, the fair market value of the stock on the date of grant.
Accordingly, no compensation expense has been recognized for the Company’s stock
option plans or employee stock purchase plan in its condensed consolidated
statements of operations, except as disclosed below. Had compensation expense
for the Company’s stock option plans and employee stock purchase plan been
determined in accordance with the fair value approach as defined by Statement
of
Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation,
the
Company’s net loss attributable to common shareholders and corresponding basic
and diluted earnings per share would have been the following (in thousands,
except per share data):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
|
Net
loss attributable to common shareholders,
as
reported
|
$
|
(6,868
|
)
|
$
|
(7,333
|
)
|
$
|
(2,624
|
)
|
$
|
(14,648
|
)
|
|
|
Fair
value of stock-based compensation, net of tax
|
(112
|
)
|
(199
|
)
|
(2,215
|
)
|
(586
|
)
|
|||||
|
Net
loss attributable to common shareholders,
pro
forma
|
$
|
(6,980
|
)
|
$
|
(7,532
|
)
|
$
|
(4,839
|
)
|
$
|
(15,234
|
)
|
|
|
Basic
and diluted loss per share, as reported
|
$
|
(.34
|
)
|
$
|
(.37
|
)
|
$
|
(.18
|
)
|
$
|
(.73
|
)
|
|
|
Basic
and diluted loss per share, pro forma
|
$
|
(.35
|
)
|
$
|
(.38
|
)
|
$
|
(.29
|
)
|
$
|
(.76
|
)
|
|
During
the quarter ended May 28, 2005 the Company awarded 100,090 shares of common
stock as restricted stock awards (RSA) to non-employee members of the Board
of
Directors and to certain key employees as a long-term incentive consistent
with
the RSAs previously made to other key employees. The fair value of these RSAs
were calculated on the measurement date and the corresponding compensation
expense was deferred as a component of shareholders’ equity and is being
expensed over the vesting period of the awards, which is three years for the
Board of Director RSAs and five years for the key employee awards. The vesting
period of the key employee RSAs may be accelerated if specified earnings
thresholds are achieved. These RSAs were valued at the closing market price
of
the Company’s common stock on the measurement date and resulted in a $0.3
million increase to deferred compensation in the Company’s balance sheet. The
cost of the common stock issued from treasury stock was $1.7 million and the
difference between the cost of the treasury stock and fair value of the award,
which totaled $1.4 million, was recorded as a reduction of additional paid-in
capital. In addition, the key employee RSA recipients received cash bonuses
for
a portion of the income tax consequences of the RSA. The cash bonuses totaled
less than $0.1 million and were expensed as a component of selling, general,
and
administrative expense when the RSAs were granted.
For
the
three quarters ended May 28, 2005, the Company awarded a total of 325,090 shares
of common stock as RSAs that resulted in a $0.7 million increase to deferred
compensation in the Company’s balance sheet. The cost of the common stock issued
from treasury stock was $5.4 million and the difference between the cost of
treasury stock and the fair value of the award, which totaled $4.7 million,
was
recorded as a reduction of additional paid-in capital.
The
RSAs
previously granted to key employees in January 2004 and to the Company’s Chief
Executive Officer (CEO) in December 2004 contain accelerated vesting provisions
if the Company achieves specified earnings thresholds. During the quarter ended
May 28, 2005, the Company achieved the specified earnings thresholds required
to
accelerate the vesting for one-half of these awards. Accordingly, during the
quarter and three quarters ended May 28, 2005, the Company expensed an
additional $0.2 million and $0.5 million, respectively, of deferred
compensation for the anticipated accelerated vesting of these restricted
stock awards.
NOTE
3 - CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS
The
Company considers highly liquid investments with insignificant interest rate
risk and original maturities to the Company of three months or less to be cash
equivalents. Cash and cash equivalents primarily consist of interest-bearing
bank accounts, money market funds, and short-term certificates of
deposit.
The
Company considers highly liquid investments with an effective maturity to the
Company of more than three months and less than one year to be short-term
investments. The Company defines effective maturity as the shorter of the
original maturity to the Company or the effective maturity as a result of the
periodic auction of its investments classified as available for sale. Management
determines the appropriate classification of investments at the time of purchase
and reevaluates such designation as of each balance sheet date. At August 31,
2004, the Company had short-term investments of $10.7 million, which were
classified as available-for-sale securities and were recorded at fair value,
which approximated cost. The Company had no short-term investments at May 28,
2005.
Realized
gains and losses on the sale of available for sale short-term investments were
insignificant for the periods presented. Unrealized gains and losses on
short-term investments were also insignificant for the periods presented. The
Company uses the specific identification method to compute the gains and losses
on its short-term investments.
NOTE
4 - INVENTORIES
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out method, and were comprised of the following (in
thousands):
|
May
28,
2005
|
August
31,
2004
|
||||||
|
Finished
goods
|
$
|
18,007
|
$
|
19,756
|
|||
|
Work
in process
|
882
|
978
|
|||||
|
Raw
materials
|
2,619
|
2,959
|
|||||
|
$
|
21,508
|
$
|
23,693
|
||||
NOTE
5 - INTANGIBLE ASSETS
The
Company’s intangible assets were comprised of the following (in
thousands):
|
May
28, 2005
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||
|
Definite-lived
intangible assets:
|
||||||||||
|
License
rights
|
$
|
27,000
|
$
|
(6,246
|
)
|
$
|
20,754
|
|||
|
Curriculum
|
58,230
|
(24,626
|
)
|
33,604
|
||||||
|
Customer
lists
|
18,774
|
(11,744
|
)
|
7,030
|
||||||
|
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
|
105,281
|
(43,893
|
)
|
61,388
|
|||||||
|
Indefinite-lived
intangible asset:
|
||||||||||
|
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
|
Balance
at May 28, 2005
|
$
|
128,281
|
$
|
(43,893
|
)
|
$
|
84,388
|
|||
|
August
31, 2004
|
||||||||||
|
Definite-lived
intangible assets:
|
||||||||||
|
License
rights
|
$
|
27,000
|
$
|
(5,543
|
)
|
$
|
21,457
|
|||
|
Curriculum
|
58,221
|
(23,067
|
)
|
35,154
|
||||||
|
Customer
lists
|
18,774
|
(10,878
|
)
|
7,896
|
||||||
|
Trade
names
|
1,277
|
(1,277
|
)
|
-
|
||||||
|
105,272
|
(40,765
|
)
|
64,507
|
|||||||
|
Indefinite-lived
intangible asset:
|
||||||||||
|
Covey
trade name
|
23,000
|
-
|
23,000
|
|||||||
|
Balance
at August 31, 2004
|
$
|
128,272
|
$
|
(40,765
|
)
|
$
|
87,507
|
|||
The
range
of remaining estimated useful lives and weighted-average amortization period
over which the Company is amortizing its major categories of definite-lived
intangible assets at August 31, 2004 were as follows:
|
Category
of Intangible Asset
|
Range
of Remaining
Estimated
Useful Lives
|
Weighted
Average Amortization Period
|
||
|
License
rights
|
22
years
|
30
years
|
||
|
Curriculum
|
2
to 22 years
|
26
years
|
||
|
Customer
lists
|
1
to 12 years
|
17
years
|
The
Company’s aggregate amortization expense totaled $1.0 million for each of the
quarters ended May 28, 2005 and May 29, 2004. Total amortization expense was
$3.1 million for each of the three quarters ended May 28, 2005 and May 29,
2004.
NOTE
6 - RESTRUCTURING AND STORE CLOSURE
COSTS
Restructuring
Costs
During
fiscal 1999, the Company’s Board of Directors approved a plan to restructure the
Company’s operations, reduce its workforce, and formally exit the Company’s
leased office space located in Provo, Utah. The Company, under a long-term
agreement, leased the Provo office space in buildings that were owned by
partnerships, the majority interest of which were owned by a Vice-Chairman
of
the Board of Directors and certain other employees and former employees of
the
Company. During the quarter ended November 27, 2004, the Company exercised
an
option, available under its master lease agreement, to purchase, and
simultaneously sell, the office facility to the current tenant, an unrelated
party. Based on the continuing negative cash flow associated with these
buildings, and other factors, the Company determined that it was in its best
interest to exercise the option and sell the property. The negotiated purchase
price with the landlord was $14.0 million and the tenant agreed to purchase
the
property for $12.5 million. These prices were within the range of estimated
fair
values of the buildings as determined by an independent appraisal obtained
by
the Company. The Company paid the difference between the sale and purchase
prices, plus other closing costs, which were included as a component of the
restructuring plan accrual. After accounting for the sale transaction, the
remaining fiscal 1999 accrued restructuring costs, which totaled $0.3 million,
were reversed and recorded as a reduction to selling, general, and
administrative expenses in the Company’s condensed consolidated statement of
operations. The Company has no further obligations under the fiscal 1999
restructuring plan.
Store
Closure Costs
The
Company regularly assesses the operating performance of its retail stores,
including previous operating performance trends and projected future
profitability. During this assessment process, judgments are made as to whether
under-performing or unprofitable stores should be closed. As a result of this
evaluation process, the Company closed 9 stores during the quarter
ended May 28, 2005 and closed 1 additional store subsequent to May 28, 2005.
For
the three quarters ended May 28, 2005, the Company has closed 23 retail
locations and may close additional retail locations during the remainder of
fiscal 2005 if further analysis indicates that the Company’s operating results
may be improved through additional closures. The Company has incurred severance
and lease termination costs related to these store closure activities, which
are
included as a component of selling, general, and administrative expenses in
the
Company’s condensed consolidated statements of operations.
The
components of the restructuring and store closure accrual were as follows for
the periods indicated (in thousands):
|
Severance
Costs
|
Leased
Space
Exit
Costs
|
Total
|
||||||||
|
Balance
at August 31, 2004
|
$
|
16
|
$
|
2,766
|
$
|
2,782
|
||||
|
Charges
to the accrual
|
178
|
67
|
245
|
|||||||
|
Amounts
utilized
|
(16
|
)
|
(2,207
|
)
|
(2,223
|
)
|
||||
|
Balance
at November 27, 2004
|
178
|
626
|
804
|
|||||||
|
Charges
to the accrual
|
79
|
169
|
248
|
|||||||
|
Amounts
utilized
|
(23
|
)
|
(102
|
)
|
(125
|
)
|
||||
|
Balance
at February 26, 2005
|
234
|
693
|
927
|
|||||||
|
Charges
to the accrual
|
-
|
9
|
9
|
|||||||
|
Amounts
utilized
|
(179
|
)
|
(80
|
)
|
(259
|
)
|
||||
|
Balance
at May 28, 2005
|
$
|
55
|
$
|
622
|
$
|
677
|
||||
At
May
28, 2005, accrued store closure costs were recorded as accrued liabilities
in
the Company’s condensed consolidated balance sheet. During the three quarters
ended May 28, 2005 the Company accrued and expensed additional leased space
exit
costs totaling $0.2 million related to changes in estimated sublease receipts
on
3 retail store closures that occurred during prior fiscal years. Although the
Company believes that its accruals for retail store closures are adequate at
May
28, 2005, these amounts are partially based upon estimates and may change if
actual amounts related to these activities differ.
NOTE
7 - PREFERRED STOCK RECAPITALIZATION
On
March
4, 2005, at the Annual Meeting of Shareholders, the Company’s shareholders
approved a plan to recapitalize the Company’s preferred stock. Under terms of
the recapitalization plan, the Company completed a one-to-four forward split
of
the existing Series A preferred stock and then bifurcated each share of Series
A
preferred stock into a new share of Series A preferred stock that is no longer
convertible into common stock, and a warrant to purchase shares of common stock.
The new Series A preferred stock retains its common-equivalent voting rights
and
will automatically convert to shares of Series B preferred stock if the holder
of the original Series A preferred stock sells, or transfers, the preferred
stock to another party. Series B preferred stock does not have common-equivalent
voting rights, but retains substantially all other characteristics of the new
Series A preferred stock. The recapitalization transaction will enable the
Company to:
|
§
|
Have
the conditional right to redeem shares of preferred stock;
|
|
|
§
|
Place
a limit on the period in which the Company may be required to issue
common
stock. The new warrants to purchase shares of common stock
expire in
eight years, compared to the perpetual right of previously
existing
Series A preferred stock to convert to shares of common
stock;
|
|
|
§
|
Increase
the Company's ability to purchase shares of its common stock.
Previous purchases of common stock were limited and potentially subject
to
the approval of Series A preferred shareholders;
|
|
|
§
|
Create
the possibility that the Company may receive cash upon issuing additional
shares of common stock to Series A preferred shareholders.
The warrants have an exercise price of $8.00 per share compared to
the
existing right of Series A preferred shareholders to convert their
preferred shares into common shares without paying cash; and
|
|
| § | Eliminate the requirement to pay common stock dividends to preferred shareholders on an "as converted" basis. |
Each
previously existing Series A preferred shareholder received a warrant to
purchase a number of common shares equal to 71.43 shares for each $1,000 ($14
per share) in aggregate liquidation value of Series A preferred shares held
immediately prior to the recapitalization transaction. The exercise price of
each warrant is $8.00 per share (subject to customary anti-dilution and exercise
features) and the warrants will be exercisable over an eight-year
term.
Upon
completion of the recapitalization transaction, Series A preferred rights were
amended to prevent the conversion of Series A preferred stock to shares of
common stock. Series B preferred stock rights were amended to be substantially
equivalent to Series A rights, except for the eliminated voting rights. The
rights of the new Series A and Series B preferred stock include the
following:
|
§
|
Liquidation
Preference-
Both Series A and Series B preferred stock have a liquidation preference
of $25.00 per share plus accrued unpaid dividends, which will be
paid in
preference to the liquidation rights of all other equity
classes.
|
|
|
§
|
Conversion
- Neither Series A nor Series B preferred stock is convertible
to
shares of common stock. Series A preferred stock converts into shares
of
Series B upon the sale or transfer of the Series A shares. Series
B
preferred stock does not have any conversion rights.
|
|
| § |
Dividends
-
Both Series A and Series B preferred stock accrue dividends at 10.0
percent, payable quarterly, in preference to dividends on all other
equity
classes. If dividends are in arrears for six or more quarters, the
number
of the Company’s Board of Directors will be increased by two and the
Series A and Series B preferred shareholders will have the ability
to
select these additional directors. Series A and Series B preferred
stock
may not participate in dividends paid to common stockholders.
|
|
|
§
|
Redemption
- The Company may redeem any of the Series A or Series B preferred
shares
during the first year following the recapitalization at a price per
share
equal to 100 percent of the liquidation preference. Subsequent to
the
first anniversary of the recapitalization and before the fifth anniversary
of the transaction, the Company may only purchase preferred shares
(up to
$30.0 million in aggregate) from Knowledge Capital, which holds the
majority of the Company’s preferred stock, at a premium that increases one
percentage point annually. After the sixth anniversary of the
recapitalization, the Company may redeem any shares of preferred
stock at
101 percent of the liquidation preference on the date of
redemption.
|
|
|
§
|
Change
in Control
-
In the event of any change in control of the Company, Knowledge Capital,
to the extent that it still holds shares of Series A preferred stock,
will
have the option to receive a cash payment equal to 101 percent of
the
liquidation preference of its Series A preferred shares then held.
The
remaining Series A and Series B preferred shareholders have no such
option.
|
|
|
§
|
Voting
Rights
-
Although the new Series A preferred shareholders will not have conversion
rights, they will still be entitled to voting rights. The holder
of each
new share of Series A preferred stock will be entitled to the voting
rights they would have if they held two shares of common stock. The
cumulative number of votes will be based upon the number of votes
attributable to shares of Series A held immediately prior to the
recapitalization transaction less any transfers of Series A shares
to
Series B shares or redemptions. In the event that a Series A preferred
shareholder exercises a warrant to purchase the Company’s common stock,
their Series A voting rights will be reduced by the number of the
common
shares issued upon exercise of the warrant. This feature will prevent
the
holders of Series A preferred stock from increasing their voting
influence
through the acquisition of additional shares of common stock from
the
exercise of the warrants.
|
|
|
§
|
Registration
Rights
-
The Company is required to use its best efforts to register the resale
of
all shares of common stock and shares of Series B preferred stock
issuable
upon the transfer and conversion of the Series A preferred stock
held by
Knowledge Capital and certain permitted transferees of Knowledge
Capital
within 240 days following the initial filing of the registration
statement
covering such shares. The initial filing of the registration statement
was
required to occur within 120 days following the closing of the
recapitalization transaction. However, the Company obtained an extension
on this filing date from Knowledge Capital to August 31, 2005, and
the
Company is currently in the process of preparing the initial registration
statement. Any failure by the Company to cause such registration
statement
to be declared effective within the specified time period would require
the Company to pay to Knowledge Capital and such permitted transferees
a
penalty amount for each share equal to two percent per annum of the
$25
face value of the preferred stock calculated based upon the number
of days
that such registration statement has not been declared effective.
Additionally, the Company would have the obligation to use its best
efforts to register the resale of the shares of common stock Knowledge
Capital and certain permitted transferees could receive pursuant
to the
exercise of the common stock warrants issued to Knowledge Capital
at the
closing of the recapitalization transaction, provided the obligation
to
register the resale of such shares would be conditioned upon the
weighted
average sales price of the common stock over the previous ten trading
days
being at least 80 percent of the common stock warrant exercise
price.
|
In
order
to account for the various aspects of the recapitalization transaction, the
Company considered guidance found in SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liability and
Equity,
Emerging Issues Task Force (EITF) Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock,
EITF
Issue D-98 Classification
and Measurement of Redeemable Securities,
and EITF
Issue D-42, The
Effect on the Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock.
Based
upon the relevant guidance found in these pronouncements, the Company accounted
for the various aspects of the preferred stock recapitalization as
follows:
New
Series A and Series B Preferred Stock - The
new
shares of preferred stock will continue to be classified as a component of
shareholders’ equity since its conversion into cash or common stock is solely
within the control of the Company as there are no provisions in the
recapitalization documents that would obligate the Company to redeem shares
of
the Series A or Series B preferred stock. In addition, by virtue of the Utah
Control Shares Act, the Company’s Bylaws, and the special voting rights of the
preferred shareholders, there are no circumstances under which a third party
could acquire controlling voting power of the Company’s stock without consent of
the Company’s Board of Directors and thus trigger the Company’s obligation to
redeem the new preferred stock. Due to the significant modifications to existing
shares of Series A and Series B preferred stock, the Company believes that
previously outstanding preferred stock was replaced with new classes of
preferred stock and common stock warrants. As a result, the new preferred stock
was recorded at its fair value on the date of modification. Consistent with
other equity instruments, the carrying value of the new preferred stock will
not
be subsequently adjusted to its fair market value at the end of any reporting
period.
The
Company engaged an independent valuation firm to determine the fair value of
the
newly issued shares of preferred stock prior to the March 8, 2005
recapitalization closing date. The fair value of the new preferred stock under
this valuation was preliminarily determined to be $20.77 per share, or $4.23
per
share less than the preferred stock’s liquidation preference of $25.00 per
share. Based upon this valuation, the Company would have recorded a
recapitalization gain of approximately $7.7 million during the quarter ended
May
28, 2005 and also would have recorded losses in future periods for redemptions
at the liquidation preference.
Subsequent
to this valuation, the Company completed the sale of its corporate headquarters
facility and redeemed $30.0 million, or 1.2 million shares, of preferred stock
at its liquidation preference (Note 15) and is considering additional
redemptions of preferred stock at the liquidation preference in the near future.
Based upon these considerations and other factors, including the improvements
in
the Company’s operating results, the Company determined that the liquidation
preference ($25.00 per share) is more indicative of the fair value of the
preferred stock at the date of the recapitalization transaction. Accordingly,
the Company recorded a loss of $7.8 million from the recapitalization
transaction since the aggregate fair value of the new shares of preferred stock
and warrants (see warrant discussion below) exceeded the carrying value of
the
old preferred stock.
Warrants
- EITF
Issue 00-19 states that warrants should be classified as a component of
shareholders’ equity if 1) the warrant contract requires physical settlement or
net-share settlement or 2) the warrant contract gives the Company a choice
of
net-cash settlement or settlement in its own shares. The Company believes that
the warrants should be accounted for as equity instruments because they meet
these requirements.
Accordingly,
the Company recorded the warrants at their fair value, as determined using
a
Black-Scholes valuation model, on the date of the transaction as a component
of
shareholders’ equity. Subsequent changes in fair value will not be recorded in
the Company’s financial statements as long as the warrants remain classified as
shareholders’ equity in accordance with EITF Issue 00-19. At the date of the
recapitalization transaction, the warrants had a fair value of $1.22 per share,
or approximately $7.6 million in total. The Company issued 6.2 million common
stock warrants in connection with the recapitalization transaction.
Derivatives
-
The
modified preferred stock agreement contains a feature that allows the Company
to
redeem preferred stock at its liquidation preference in the first year following
the recapitalization transaction and at 101 percent of the liquidation
preference after the sixth anniversary of the recapitalization
transaction. In accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
the
Company has determined that this embedded call feature is not a derivative
because the contract is both 1) indexed in Company stock, and 2) is classified
in stockholders’ equity on the Company’s balance sheet.
A
separate agreement exists with Knowledge Capital, the entity that holds the
majority of the Series A preferred stock, which contains a call option to redeem
$30.0 million of preferred stock at 100 percent to 103 percent of the
liquidation preference as well as a “change in control” put option at 101
percent of the liquidation preference. This agreement is a derivative and meets
the criteria found in paragraph 11 of SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities
and
Equity,
to be
separately accounted for as a liability. Therefore, the incremental redemption
features (the amounts in excess of the 101 percent call option) will be valued
at fair value based upon the likelihood of exercise and the expected incremental
amount to be paid upon exercise. This derivative-based liability will require
adjustment to fair value at each reporting period and had an initial value
of
zero on the date of the recapitalization transaction. As of May 28, 2005, the
fair value of this derivative-based liability was zero.
NOTE
8 - GAIN ON DISPOSAL OF INVESTMENT IN UNCONSOLIDATED
SUBSIDIARY
During
fiscal 2003, the Company purchased approximately 20 percent of the capital
stock
(subsequently diluted to approximately 12 percent ownership) of Agilix Labs,
Inc. (Agilix), a Delaware corporation, for cash payments totaling $1.0 million.
Agilix is a development stage enterprise that develops software applications,
including the majority of the Company’s software applications that are available
for sale to external customers. The Company used the equity method of accounting
for its investment in Agilix, as the Company appointed a member to Agilix’s
board of directors and had the ability to exercise significant influence over
the operations of Agilix. Although the Company continues to sell software
developed by Agilix, uncertainties in Agilix’s business plan developed during
the Company’s fiscal quarter ended March 1, 2003 and their potential adverse
effects on Agilix’s operations and future cash flows were significant. The
Company determined that its ability to recover the carrying value of the
investment in Agilix was remote. Accordingly, the Company impaired and expensed
its remaining investment in Agilix of $0.9 million during the quarter ended
March 1, 2003.
During
the quarter ended May 28, 2005, certain affiliates of Agilix purchased the
shares of capital stock held by the Company for $0.5 million in cash, which
was
reported as a gain on disposal of investment in unconsolidated subsidiary.
Following the sale of the Agilix capital stock, the Company has no remaining
ownership interest in Agilix and no representative on their board of
directors.
NOTE
9 - INCOME TAXES
The
Company recorded income tax benefits for the quarters ended May 28, 2005 and
May
29, 2004 totaling $3.0 million and $0.8 million, respectively. For the three
quarters ended May 28, 2005, the Company recognized an income tax benefit of
$1.2 million compared to an income tax provision of $1.0 million for the
corresponding period ended May 29, 2004. Except for the income tax provision
recognized for the three quarters ended May 29, 2004, the income tax benefits
during these periods resulted primarily from the resolution of various tax
matters, partially offset by income taxes incurred by the Company’s profitable
foreign subsidiaries and foreign income taxes on payments received from foreign
licensees. The income tax provision for the three quarters ended May 29, 2004
resulted from income taxes incurred by the Company’s foreign subsidiaries and
foreign income taxes on payments received from foreign licensees, partially
offset by the income tax benefits of resolving various tax matters. The increase
in the recorded benefit was primarily due to the magnitude of the tax matters
that were resolved in fiscal 2005 compared to the issues resolved in the prior
year. During the periods ended May 28, 2005 and May 29, 2004, the Company was
unable to offset its tax liabilities in foreign jurisdictions with its domestic
operating loss carryforwards. In addition, a history of significant operating
losses has precluded the Company from demonstrating that it is more likely
than
not that the benefits of domestic operating loss carryforwards, together with
the benefits of other deferred income tax assets will be realized. Accordingly,
the Company has recorded valuation allowances on its domestic deferred income
tax assets.
NOTE
10 - COMPREHENSIVE INCOME
Comprehensive
income includes charges and credits to equity accounts that are not the result
of transactions with shareholders and is comprised of net income or loss and
other comprehensive income and loss items. Comprehensive income for the Company
was as follows (in thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
|
Net
income (loss)
|
$
|
3,069
|
$
|
(5,149
|
)
|
$
|
11,680
|
$
|
(8,097
|
)
|
|||
|
Other
comprehensive income
(loss)
items:
|
|||||||||||||
|
Adjustment
for fair value of
hedge
derivatives
|
-
|
(62
|
)
|
(318
|
)
|
(62
|
)
|
||||||
|
Foreign
currency translation
adjustments
|
(455
|
)
|
(285
|
)
|
(52
|
)
|
506
|
||||||
|
Comprehensive
income (loss)
|
$
|
2,614
|
$
|
(5,496
|
)
|
$
|
11,310
|
$
|
(7,653
|
)
|
|||
NOTE
11 - EARNINGS PER SHARE
Basic
earnings per common share (EPS) is calculated by dividing net income or loss
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is calculated by dividing net income
or
loss available to common shareholders, by the weighted-average number of common
shares outstanding plus the assumed exercise of all dilutive securities using
the treasury stock method or the “as converted” method, as appropriate.
Following the preferred stock recapitalization (Note 7), the Company’s preferred
stock is no longer convertible or entitled to participate in dividends payable
to holders of common stock. Accordingly, the Company no longer uses the two
class method as defined in SFAS No. 128, Earnings
Per Share,
and
EITF Issue 03-6, Participating
Securities and the Two-Class Method under FASB Statement No.
128
to
calculate basic EPS for periods after February 26, 2005. The following table
presents the computation of the Company’s EPS for the periods indicated (in
thousands, except per share amounts):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
|
Net
income (loss)
|
$
|
3,069
|
$
|
(5,149
|
)
|
$
|
11,680
|
$
|
(8,097
|
)
|
|||
|
Non-convertible
preferred stock dividends
|
(2,184
|
)
|
(2,184
|
)
|
|||||||||
|
Convertible
preferred stock dividends
|
(2,184
|
)
|
(4,367
|
)
|
(6,551
|
)
|
|||||||
|
Loss
on recapitalization of preferred stock
|
(7,753
|
)
|
(7,753
|
)
|
|||||||||
|
Net
loss attributable to common shareholders
|
$
|
(6,868
|
)
|
$
|
(7,333
|
)
|
$
|
(2,624
|
)
|
$
|
(14,648
|
)
|
|
|
Undistributed
income (loss) through February 26, 2005
|
$
|
-
|
$
|
-
|
$
|
4,244
|
$
|
-
|
|||||
|
Common
stock ownership on an as-converted basis
|
-
|
-
|
76
|
%
|
-
|
||||||||
|
Common
shareholder interest in undistributed income through
February 26, 2005
|
-
|
-
|
3,225
|
-
|
|||||||||
|
Undistributed
loss for the quarters ended May 28, 2005 and
May 29, 2004
|
(6,868
|
)
|
(7,333
|
)
|
(6,868
|
)
|
(14,648
|
)
|
|||||
|
Common
shareholder interest in undistributed loss (1)
|
$
|
(6,868
|
)
|
$
|
(7,333
|
)
|
$
|
(3,643
|
)
|
$
|
(14,648
|
)
|
|
|
Weighted
average common shares outstanding - Basic
|
19,922
|
19,940
|
19,847
|
19,947
|
|||||||||
|
Common
share equivalents (2)
|
-
|
-
|
-
|
-
|
|||||||||
|
Weighted
average common shares outstanding - Diluted
|
19,922
|
19,940
|
19,847
|
19,947
|
|||||||||
|
Basic
EPS - Common
|
$
|
(.34
|
)
|
$
|
(.37
|
)
|
$
|
(.18
|
)
|
$
|
(.73
|
)
|
|
|
Diluted
EPS - Common
|
$
|
(.34
|
)
|
$
|
(.37
|
)
|
$
|
(.18
|
)
|
$
|
(.73
|
)
|
|
(1)
Preferred
shareholders do not participate in any undistributed losses with common
shareholders, therefore no adjustment to the fiscal 2004 loss per share
information was made.
(2)
For
the
quarter and three quarters ended May 28, 2005 and May 29, 2004, conversion
of
common share equivalents is not assumed because such conversion would be
anti-dilutive.
Due
to
their anti-dilutive effect, the following incremental shares from Series A
preferred stock calculated on an “as converted” basis and the potential common
stock equivalents resulting from options to purchase common stock and non-vested
shares of restricted stock deferred compensation that were calculated using
the
treasury stock method have been excluded from the diluted EPS calculation (in
thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
|
Number
of Series A preferred stock shares on an “as converted”
basis
|
-
|
6,239
|
-
|
6,239
|
|||||||||
|
Common
stock equivalents from the assumed exercise of in-the-money stock
options
|
24
|
29
|
17
|
21
|
|||||||||
|
Common
stock equivalents from non-vested restricted stock deferred
compensation
|
405
|
-
|
151
|
-
|
|||||||||
|
429
|
6,268
|
168
|
6,260
|
||||||||||
At
May
28, 2005 the Company had approximately 2.3 million stock options outstanding
which were not included in the computation of diluted EPS because the options’
exercise prices were greater than the average market price of the Company’s
common shares. Also, a result of the preferred stock recapitalization, the
Company issued 6.2 million common stock warrants during the quarter ended May
28, 2005 with an exercise price of $8.00 per share that were not included in
the
Company’s EPS calculation because their exercise price was higher than the
average market price of the Company’s common stock. These warrants, which expire
in eight years, may have a dilutive impact on the Company’s EPS in future
periods.
NOTE
12 - SEGMENT INFORMATION
The
Company has two reporting segments: the Consumer and Small Business Unit (CSBU)
and the Organizational Solutions Business Unit (OSBU). The following is a
description of the Company’s reporting segments, their primary operating
components, and their significant business activities:
Consumer
and Small Business Unit - This
business unit is primarily focused on sales to individual customers and small
business organizations and includes the results of the Company’s domestic retail
stores, consumer direct operations (catalog and eCommerce), wholesale operations
and other related distribution channels, including government product sales
and
domestic printing and publishing sales. The CSBU results of operations also
include the financial results of the Company’s paper planner manufacturing
operations. Although CSBU sales primarily consist of products such as planners,
binders, software, and handheld electronic planning devices, virtually any
component of the Company’s leadership, productivity, and strategy execution
solutions may be purchased through CSBU channels. The Company has recently
expanded its efforts to increase sales to small businesses through its CSBU
channels.
Organizational
Solutions Business Unit - The
OSBU
is primarily responsible for the development, marketing, sale, and delivery
of
productivity, leadership, strategy execution, sales force performance, and
communication training and consulting solutions directly to organizational
clients, including other companies, the government, and educational
institutions. The OSBU includes the financial results of the Organizational
Solutions Group (OSG) and international operations. The OSG is responsible
for
the domestic sale and delivery of the Company’s training and consulting
services. The Company’s international sales group includes the financial results
of its directly owned foreign offices and royalty revenues from
licensees.
The
Company’s chief operating decision maker is the CEO, and each of the reportable
segments has a president who reports directly to the CEO. The primary
measurement tool used in business unit performance analysis is earnings before
interest, taxes, depreciation, and amortization (EBITDA), which may not be
calculated as similarly titled amounts are calculated by other companies. For
segment reporting purposes, the Company’s consolidated EBITDA can be calculated
as its income or loss from operations excluding depreciation and amortization
charges.
In
the
normal course of business, the Company may make structural and cost allocation
revisions to its segment information to reflect new reporting responsibilities
within the organization. All prior period segment information has been revised
to conform to the most recent classifications and organizational changes. The
Company accounts for its segment information on the same basis as the
accompanying condensed consolidated financial statements.
SEGMENT
INFORMATION
(in
thousands)
|
|
Consumer
and Small Business Unit
|
Organizational
Solutions Business Unit
|
|||||||||||||||||||||||
|
Quarter
Ended May 28, 2005
|
Retail
|
Consumer
Direct
|
Wholesale
|
Other
CSBU
|
OSG
|
International
|
Corporate
and Eliminations
|
Consolidated
|
|||||||||||||||||
|
Sales
to external customers
|
$
|
13,443
|
$
|
10,114
|
$
|
7,627
|
$
|
792
|
$
|
20,766
|
$
|
13,046
|
$
|
65,788
|
|||||||||||
|
Gross
margin
|
7,392
|
5,737
|
3,459
|
(187
|
)
|
13,045
|
8,674
|
38,120
|
|||||||||||||||||
|
EBITDA
|
(1,083
|
)
|
3,863
|
3,292
|
(5,014
|
)
|
2,354
|
2,744
|
(3,483
|
)
|
2,673
|
||||||||||||||
|
Depreciation
|
614
|
23
|
163
|
74
|
331
|
643
|
1,848
|
||||||||||||||||||
|
Amortization
|
86
|
954
|
2
|
1
|
1,043
|
||||||||||||||||||||
|
Quarter
Ended May 29, 2004
|
|||||||||||||||||||||||||
|
Sales
to external customers
|
$
|
16,005
|
$
|
9,685
|
$
|
6,820
|
$
|
629
|
$
|
15,862
|
$
|
12,247
|
$
|
61,248
|
|||||||||||
|
Gross
margin
|
8,184
|
5,296
|
3,069
|
(1,526
|
)
|
9,491
|
8,147
|
32,661
|
|||||||||||||||||
|
EBITDA
|
(2,968
|
)
|
3,039
|
2,861
|
(5,639
|
)
|
287
|
2,390
|
(2,437
|
)
|
(2,467
|
)
|
|||||||||||||
|
Depreciation
|
819
|
249
|
242
|
87
|
353
|
759
|
2,509
|
||||||||||||||||||
|
Amortization
|
86
|
954
|
2
|
1
|
1,043
|
||||||||||||||||||||
|
Three
Quarters Ended May 28, 2005
|
|||||||||||||||||||||||||
|
Sales
to external customers
|
$
|
59,886
|
$
|
44,016
|
$
|
16,107
|
$
|
2,542
|
$
|
53,677
|
$
|
41,187
|
$
|
217,415
|
|||||||||||
|
Gross
margin
|
34,369
|
25,590
|
7,536
|
(1,865
|
)
|
35,621
|
28,093
|
129,344
|
|||||||||||||||||
|
EBITDA
|
5,453
|
19,284
|
6,995
|
(17,607
|
)
|
5,398
|
9,903
|
(9,970
|
)
|
19,456
|
|||||||||||||||
|
Depreciation
|
2,136
|
516
|
512
|
228
|
994
|
1,960
|
6,346
|
||||||||||||||||||
|
Amortization
|
258
|
2,862
|
5
|
5
|
3,130
|
||||||||||||||||||||
|
Three
Quarters Ended May 29, 2004
|
|||||||||||||||||||||||||
|
Sales
to external customers
|
$
|
71,341
|
$
|
44,162
|
$
|
16,946
|
$
|
1,850
|
$
|
42,920
|
$
|
37,774
|
$
|
214,993
|
|||||||||||
|
Gross
margin
|
38,480
|
25,131
|
7,537
|
(3,757
|
)
|
26,679
|
25,741
|
119,811
|
|||||||||||||||||
|
EBITDA
|
2,242
|
16,200
|
6,747
|
(18,407
|
)
|
(2,750
|
)
|
8,425
|
(7,199
|
)
|
5,258
|
||||||||||||||
|
Depreciation
|
2,607
|
807
|
1
|
944
|
518
|
985
|
3,460
|
9,322
|
|||||||||||||||||
|
Amortization
|
258
|
2,862
|
6
|
4
|
3,130
|
||||||||||||||||||||
A
reconciliation of reportable segment EBITDA to consolidated loss before income
taxes is provided below (in thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
|
Reportable
segment EBITDA
|
$
|
6,156
|
$
|
(30
|
)
|
$
|
29,426
|
$
|
12,457
|
||||
|
Restructuring
cost reversal
|
306
|
||||||||||||
|
Recovery
of investment in unconsolidated subsidiary
|
500
|
500
|
|||||||||||
|
Corporate
expenses
|
(3,983
|
)
|
(2,437
|
)
|
(10,776
|
)
|
(7,199
|
)
|
|||||
|
Consolidated
EBITDA
|
2,673
|
(2,467
|
)
|
19,456
|
5,258
|
||||||||
|
Depreciation
|
(1,848
|
)
|
(2,509
|
)
|
(6,346
|
)
|
(9,322
|
)
|
|||||
|
Amortization
|
(1,043
|
)
|
(1,043
|
)
|
(3,130
|
)
|
(3,130
|
)
|
|||||
|
Income
(loss) from operations
|
(218
|
)
|
(6,019
|
)
|
9,980
|
(7,194
|
)
|
||||||
|
Interest
income
|
310
|
85
|
592
|
313
|
|||||||||
|
Interest
expense
|
(29
|
)
|
(27
|
)
|
(95
|
)
|
(195
|
)
|
|||||
|
Income
(loss) before provision for income taxes
|
$
|
63
|
$
|
(5,961
|
)
|
$
|
10,477
|
$
|
(7,076
|
)
|
|||
NOTE
13 - EXECUTIVE SEPARATION AGREEMENT
Effective
March 29, 2005, Val J. Christensen, Executive Vice-President, General Counsel
and Secretary of the Company, terminated his service as an executive officer
and
employee of the Company. Under the terms of the corresponding Separation
Agreement, the Company paid Mr. Christensen a lump-sum severance amount totaling
$0.9 million, less applicable withholdings. In addition, he will receive the
cash performance bonus he would have been entitled to for the current fiscal
year as if he had remained employed in his prior position and his performance
objectives for the year were met, which is estimated to be $0.2 million. In
addition to these payments, his shares of restricted stock were fully vested
and
he received a bonus of $0.1 million, which was equivalent to other bonuses
awarded in the January 2004 RSA, to offset a portion of the income taxes
resulting from the vesting of his restricted stock award. The Company also
waived the requirement that his fully-vested stock options be exercised within
90 days of his termination and allowed the options to be exercised through
the
term of the option agreement. The Company accounted for the stock option
modifications under APB Opinion 25 and related pronouncements and did not
recognize additional compensation expense in the Company’s financial statements
as the fair value of the Company’s stock was less than the exercise price of the
modified stock options on the re-measurement date. However, the fair value
of
these stock option modifications using guidance in SFAS No. 123 was
approximately $0.1 million and was included in the pro forma stock-based
compensation expense reported in Note 2. Subsequent to his separation, the
Board
of Directors approved modifications to his management stock loan substantially
similar to the modifications granted to other loan participants by the Board
of
Directors in May 2004 under which the Company will forego certain of its rights
under the terms of the loans in order to potentially improve the participants’
ability to pay, and the Company’s ability to collect, the outstanding balances
of the loans.
Subsequent
to entering into the Separation Agreement, the Company and Mr. Christensen
entered into a Legal Services Agreement that is effective March 29, 2005. Under
terms of the Legal Services Agreement, the Company retained Mr. Christensen
as
independent legal counsel to provide services to the Company for a minimum
of
1,000 hours per year. The Legal Services Agreement allows the Company to benefit
from Mr. Christensen’s extensive institutional knowledge and experience gained
from serving as the Company’s General Counsel as well as his experience
representing the Company as external counsel for several years prior to joining
the Company. The Company will pay Mr. Christensen an annual retainer in the
amount of $0.2 million, the equivalent of $225 per hour for each hour of legal
services, and $325 per hour for every hour of legal services, if any, provided
in excess of 1,000 hours in any given year. Further, Mr. Christensen will be
an
independent contractor and not entitled to Company benefits for performing
these
services.
NOTE
14 - LEGAL SETTLEMENT
In
fiscal
2002, the Company brought legal action against World Marketing Alliance, Inc.,
a
Georgia corporation (WMA) and World Financial Group, Inc., a Delaware
corporation and the purchaser of substantially all assets of WMA, for breach
of
contract. The case proceeded to jury trial commencing October 25, 2004. The
jury
rendered a verdict in the Company’s favor and against WMA on November 1, 2004
for the entire unpaid contract amount of approximately $1.1 million. In addition
to the verdict, the Company recovered legal fees totaling $0.3 million and
pre-
and post-judgment interest of $0.3 million from WMA. The Company received
payment in cash for the legal settlement during the quarter ended May 28, 2005.
However, shortly after paying the legal settlement, WMA appealed the jury
decision to the 10th
Circuit
Court of Appeals. As a result of the appeal, the Company recorded the cash
received and a corresponding increase to accrued liabilities, and will not
recognize the gain from the legal settlement until the case is completely
resolved.
NOTE
15 - SUBSEQUENT EVENTS
Sale
of Corporate Headquarters Facility
On
June
21, 2005 the Company completed the sale and leaseback of its corporate
headquarters facility, located in Salt Lake City, Utah. The sale price was
$33.8
million in cash and after deducting customary closing costs, including
commissions and payment of the remaining mortgage on one of the buildings,
the
Company received net proceeds totaling $32.4 million. In connection with the
transaction, the Company entered into a 20-year master lease agreement with
the
purchaser, an unrelated private investment group. The master lease on the
corporate headquarters facility requires monthly payments totaling $3.0 million
per year for the first five years of the contract and two percent annual
increases thereafter through the remaining term of the master lease agreement.
The master lease agreement also contains six five-year options to renew the
master lease agreement, thus allowing the Company to maintain its operations
at
the current location for up to 50 years.
Redemption
of Preferred Stock
Subsequent
to May 28, 2005, the Company used $30.0 million of the proceeds from the sale
of
its corporate headquarters facility to redeem 1.2 million shares of
Series
A preferred stock (Note 7). The redemption was made under the provisions of
the
recently approved recapitalization plan and was at 100 percent of the
liquidation preference for the shares of preferred stock. This redemption will
reduce the Company’s preferred stock dividend obligation by $3.0 million per
year.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s
discussion and analysis contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based upon management’s current expectations and are subject to various
uncertainties and changes in circumstances. Important factors that could cause
actual results to differ materially from those described in forward-looking
statements are set forth below under the heading Safe Harbor Statement Under
the
Private Securities Litigation Reform Act of 1995.
The
Company suggests that the following discussion and analysis be read in
conjunction with the Consolidated Financial Statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended August 31,
2004.
Overview
Our
third
fiscal quarter, which includes the months of March, April, and May has
historically reflected seasonally lower product sales, but generally stronger
training and service sales compared to our first two fiscal quarters. As a
result of seasonal product sales factors, our third fiscal quarter has not
historically been as profitable as other quarters of our fiscal year. However,
our financial results for the quarter and three quarters ended May 28, 2005
continue to demonstrate significant improvements over the comparable periods
of
the prior year, including increased sales, improved gross margins, and lower
operating costs, and reflects the favorable momentum that began in prior
periods. For the quarter ended May 28, 2005, our loss from operations improved
to $0.2 million, compared to a loss of $6.0 million in the prior year. Our
operating income for the three quarters ended May 28, 2005 improved by $17.2
million as we recognized operating income of $10.0 million compared to an
operating loss of $7.2 million for the first three quarters of fiscal 2004.
Including a $7.8 million loss from our preferred stock recapitalization, our
net
loss attributable to common shareholders for the quarter ended May 28, 2005
was
$6.9 million, compared to a net loss in the prior year of $7.3 million. For
the
three quarters ended May 28, 2005, our net loss attributable to common
shareholders improved by $12.0 million and was $2.6 million compared to a net
loss of $14.6 million for the corresponding period of fiscal 2004. The net
loss
for the three quarters ended May 28, 2005 includes the $7.8 million loss from
our preferred stock recapitalization and reduced net income available to common
shareholders on a comparable basis to the prior year from $5.1 million to the
reported loss of $2.6 million. The primary factors that influenced our reported
financial results for the quarter ended May 28, 2005 were as
follows:
|
§
|
Sales
Performance - Training and consulting services sales
increased $4.4 million compared to the third quarter of the prior
year,
which was attributable to increased training and consulting sales
in both
domestic and international delivery channels. We have recently completed
significant enhancements to The 7 Habits of Highly Effective People
training courses and related products, which were released in
March
2005. We believe that our refreshed course materials and related
products,
in combination with our other training offerings, will be a factor
in
continuing improvements in our training and consulting sales
performance.
Product
sales increased by $0.2 million, which was primarily due to improved
“core” product (e.g. planners, binders, and totes) sales, the timing
of
wholesale product orders, and increased publishing revenue in Japan
related to the release of The
8th
Habit, From Effectiveness to Greatness,
by Dr. Stephen R. Covey. These favorable product sales results
were
partially offset by the impact of closed retail stores and declining
technology and specialty product sales compared to the prior
year.
|
|
|
§
|
Gross
Margin Improvement - Our
gross margin improved compared to the prior year primarily due to
increased training and consulting sales as a percent of total sales,
favorable product and training program mix changes, reduced product
costs,
and lower overall costs in delivering our training and consulting
service
sales.
|
|
|
§
|
Decreased Operating Costs -
Overall
operating costs decreased by $0.3 million, primarily due to reduced
depreciation and the recovery of a previously impaired investment
in an
unconsolidated subsidiary. However, our selling, general, and
administrative (SG&A) expenses increased compared to the prior year
primarily due to higher commissions on increased training sales and
severance costs related to an executive separation agreement. Consistent
with prior periods, we continue to seek for and implement strategies
that
will enable us to reduce our operating costs in order to improve
our
profitability.
|
|
|
§
|
Income Taxes -
We
recognized a net income tax benefit totaling $3.0 million during
the
quarter ended May 28, 2005 compared to a $0.8 million benefit in
the prior
year. The tax benefit for the quarter ended May 28, 2005 resulted
primarily from the resolution of various income tax matters, that
were
partially offset by income taxes incurred by the Company’s profitable
foreign subsidiaries and foreign income taxes on payments received
from
foreign licensees.
|
|
|
§
|
Completion
of the Preferred Stock Recapitalization - During
the quarter, we completed a preferred stock recapitalization and
recorded
a $7.8 million loss resulting from the revaluation of our preferred
stock
and valuation of the newly issued common stock warrants.
|
Although
we achieved improved financial results compared to the prior year, we have
not
yet attained our targeted business model and we are therefore continuing our
efforts to increase sales, improve gross margins, and reduce operating costs
in
order to achieve consistently profitable operations. Further details regarding
our operating results and liquidity are provided throughout the following
management’s discussion and analysis.
Quarter
Ended May 28, 2005 Compared to the Quarter Ended May 29, 2004
Sales
The
following table sets forth sales data for our operating segments (in
thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||||||||
|
May
28,
2005
|
May
29,
2004
|
Percent
Change
|
May
28,
2005
|
May
29,
2004
|
Percent
Change
|
||||||||||||||
|
Consumer
and Small Business Unit:
|
|||||||||||||||||||
|
Retail
Stores
|
$
|
13,443
|
$
|
16,005
|
(16)
|
|
$
|
59,886
|
71,341
|
(16)
|
|
||||||||
|
Consumer
Direct
|
10,114
|
9,685
|
4
|
44,016
|
44,162
|
-
|
|||||||||||||
|
Wholesale
|
7,627
|
6,820
|
12
|
16,107
|
16,946
|
(5)
|
|
||||||||||||
|
Other
CSBU
|
792
|
629
|
26
|
2,542
|
1,850
|
37
|
|||||||||||||
|
31,976
|
33,139
|
(4)
|
|
122,551
|
134,299
|
(9)
|
|
||||||||||||
|
Organizational
Solutions Business Unit:
|
|
||||||||||||||||||
|
Organizational
Solutions Group
|
20,766
|
15,862
|
31
|
53,677
|
42,920
|
25
|
|||||||||||||
|
International
|
13,046
|
12,247
|
7
|
41,187
|
37,774
|
9
|
|||||||||||||
|
33,812
|
28,109
|
20
|
94,864
|
80,694
|
18
|
||||||||||||||
|
Total
Sales
|
$
|
65,788
|
$
|
61,248
|
7
|
$
|
217,415
|
$
|
214,993
|
1
|
|||||||||
Product
Sales - Product
sales, which primarily consist of planners, binders, software, handheld
electronic planning devices, and publishing services, which are primarily sold
through our Consumer and Small Business Unit (CSBU) channels, increased $0.2
million, or one percent, compared to the quarter ended May 29, 2004. The slight
increase in product sales was primarily due to improved core product sales,
sales performance in our wholesale channel, and increased publishing revenues
in
Japan (which are recognized as international sales in the Organizational
Solutions Business Unit) related to the release of The
8th
Habit, From Effectiveness to Greatness,
by Dr.
Stephen R. Covey. These sales improvements were partially offset by decreased
retail store sales. The following is a description of significant sales
fluctuations in our CSBU channels:
|
§
|
Retail Sales
- The
decline in retail sales was primarily due to fewer stores, the impact
of
which totaled $2.4 million, and reduced technology and specialty
product
sales, which totaled $1.2 million. Declining technology and specialty
product sales were partially offset by increased “core” product (e.g.
planners, binders, and totes) sales during the period. Comparable
store
(stores which were open during the comparable periods) sales declined
by
two percent compared to the prior year. During fiscal 2004, we closed
18
retail store locations and we have closed 23 additional stores during
the
first three quarters of fiscal 2005. At May 28, 2005, we were operating
112 retail stores compared to 141 stores at May 29, 2004.
|
|
|
§
|
Consumer Direct
- Sales
through our consumer direct channels (catalog and eCommerce) improved
primarily due to increased “core” product sales compared to the prior year
and from sales that transitioned to these channels from closed
stores.
|
|
|
§
|
Wholesale Sales - Sales through our wholesale channel, which includes sales to office superstores and other retail chains, increased primarily due to the timing of product sales to these entities. |
Training
and Consulting Services Sales - We
offer
a variety of training solutions, training related products, and consulting
services focused on productivity, leadership, strategy execution, sales force
performance, and effective communications training programs that are provided
both domestically and internationally through the Organizational Solutions
Business Unit (OSBU). Our overall training and related consulting service sales
increased by $4.4 million, or 17 percent, compared to the same period of the
prior year. The improvement in training sales was reflected in increased
domestic training program sales, which are delivered through our Organizational
Sales Group (OSG), as well as through our international operations. OSG sales
performance improved in nearly all of our domestic sales regions and was
primarily attributable to increased client facilitated sales of the enhanced
The
7
Habits of Highly Effective People
training
course, improved sales of our 4 Disciplines of Leadership and xQ offerings,
and
increased sales performance group sales. International sales improved primarily
due to the translation of foreign sales amounts as foreign currencies
strengthened against the United States dollar increased sales in Japan, and
increased licensee royalty revenues. The favorable impact of currency
translation on reported international revenues totaled $0.5 million for the
quarter ended May 28, 2005.
Gross
Margin
Gross
margin consists of net sales less the cost of goods sold or services provided.
Our overall gross margin for the quarter improved to 57.9 percent of sales,
compared to 53.3 percent in the comparable quarter of fiscal 2004. This overall
gross margin improvement is consistent with gross margin performance during
our
first two quarters of fiscal 2005 and was primarily due to increased training
and consulting sales as a percent of total sales, favorable product mix changes,
and improved margins on our training and consulting service sales. Training
and
consulting service sales, which typically have higher gross margins than our
product sales, increased to 46 percent of total sales during the quarter ended
May 28, 2005 compared to 43 percent in the prior year. Our gross margin on
product sales improved to 51.6 percent compared to 46.5 percent in fiscal 2004
and was primarily due to a favorable shift in our product mix as sales of
higher-margin paper products and binders increased as a percent of total sales,
while sales of lower-margin technology and specialty products continue to
decline. Additionally, the overall margin on paper and binder sales has improved
through focused cost reduction efforts and improved inventory
management.
Training
and related consulting services gross margin, as a percent of sales of these
services, improved to 65.3 percent compared to 62.4 percent in the corresponding
quarter of fiscal 2004. The improvement in our training and consulting services
gross margin was primarily due to a continued shift in training sales mix toward
higher-margin courses and offerings, reduced costs for training materials,
such
as participant manuals and related items, and overall lower costs associated
with training sales.
Operating
Expenses
Selling,
General and Administrative - Our
selling, general, and administrative expenses increased $0.8 million, or two
percent, compared to the corresponding quarter of fiscal 2004. However, total
SG&A expense as a percent of sales decreased to 54.6 percent compared to
57.4 percent in the prior year. We continue to implement cost-cutting strategies
that have been successful in reducing our operating costs, including retail
store closures, headcount reductions, consolidation of corporate office space,
and other measures designed to focus our resources on critical activities and
projects. However, during the quarter ended May 28, 2005 our cost reduction
efforts were offset by expenses related to increased commission expenses related
to increased training sales, severance costs for a former executive officer,
and
additional costs associated with the preferred stock recapitalization. We also
recognized $0.1 million of expense related to the closure of retail store
locations during the quarter as described below.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future profitability. During
this assessment process, judgments are made as to whether under-performing
or
unprofitable stores should be closed. As a result of this evaluation process,
we
closed 9 stores during the quarter ended May 28, 2005, closed 1 additional
store
subsequent to May 28, 2005, and may close additional retail locations during
the
remainder of fiscal 2005. The number of retail stores that we plan to close
may
increase if further analysis indicates that the Company’s operating results may
be improved through additional closures, due to the higher costs associated
with
operating our retail store channel. Retail locations that are currently being
evaluated for potential closure primarily consist of under performing stores,
stores in markets where we have multiple retail locations, or in locations
where
the underlying lease expires. The costs associated with closing retail stores
are typically comprised of charges related to vacating the premises, which
may
include a provision for the remaining term on the lease, and severance and
other
personnel costs. These store closure costs totaled $0.1 million during the
quarter ended May 28, 2005 and were included as a component of our SG&A
expenses. Based upon our continuing analyses of retail store performance, we
may
close additional retail stores and may continue to incur costs associated with
closing these stores in future periods.
Gain
on Disposal of Investment in Unconsolidated Subsidiary - During
fiscal 2003, we purchased approximately 20 percent of the capital stock
(subsequently diluted to approximately 12 percent ownership) of Agilix Labs,
Inc. (Agilix), for cash payments totaling $1.0 million. Agilix is a development
stage enterprise that develops software applications, including the majority
of
our software applications that are available for sale to external customers.
Although we continue to sell software developed by Agilix, uncertainties in
Agilix’s business plan developed during our fiscal quarter ended March 1, 2003
and their potential adverse effects on Agilix’s operations and future cash flows
were significant. As a result of this assessment, we determined that our ability
to recover the investment in Agilix was remote. Accordingly, we impaired and
expensed our remaining investment in Agilix of $0.9 million during the quarter
ended March 1, 2003. During the quarter ended May 28, 2005, certain affiliates
of Agilix purchased the shares of capital stock held by us for $0.5 million
in
cash, which was reported as a gain on disposal of an investment in
unconsolidated subsidiary.
Depreciation
and Amortization - Depreciation
expense decreased $0.7 million, or 26 percent, compared to the corresponding
quarter of fiscal 2004 primarily due to the full depreciation or disposal of
certain property and equipment balances, primarily computer software and
hardware assets, and the effects of significantly reduced capital expenditures
during preceding fiscal years. Based upon these events and current capital
spending trends, we expect that depreciation expense will continue to decline
compared to prior periods during the remainder of fiscal 2005.
Amortization
expense on definite-lived intangible assets totaled $1.0 million for the
quarters ended May 28, 2005 and May 29, 2004. We expect intangible asset
amortization expense to total $4.2 million in fiscal 2005.
Income
Taxes
The
income tax benefits of $3.0 million in the current year and $0.8 million
recorded in fiscal 2004 resulted primarily from the resolution of various income
tax matters, which were partially offset by income taxes incurred by the
Company’s profitable foreign subsidiaries and foreign income taxes on payments
received from foreign licensees. The increase in the recorded benefit was
primarily due to the magnitude of the tax matters that were resolved in fiscal
2005 compared to the issues resolved in the prior year.
Loss
on Recapitalization of Preferred Stock
We
completed our preferred stock recapitalization during the quarter ended May
28,
2005. Due to the significant modifications to our preferred stock, we believe
that previously outstanding preferred stock was replaced with new classes of
preferred stock and common stock warrants. As a result, the new preferred stock
was recorded at its fair value on the date of modification, which was determined
to be equal to the liquidation preference of $25 per share. The difference
between the aggregate fair value of the consideration given (the new Series
A
preferred stock and the common stock warrants) and the carrying value of the
previously existing Series A preferred stock, which totaled $7.8 million, was
reported as a loss on recapitalization of preferred stock, which decreased
net
income attributable to common shareholders in the quarter ended May 28, 2005.
Subsequent to May 28, 2005, we used $30.0 million of the proceeds from the
June
2005 sale of our corporate headquarters facility to redeem shares of preferred
stock under terms of the recapitalization plan.
Three
Quarters Ended May 28, 2005 Compared to the Three Quarters Ended May 29,
2004
Sales
Product
Sales - Product
sales, which primarily consist of planners, binders, software, handheld
electronic planning devices, and publishing sales, which are primarily sold
through our CSBU channels, declined $9.4 million, or seven percent, compared
to
fiscal 2004. The decline in product sales was primarily due to decreased sales
in our retail and wholesale delivery channels, with the majority of the decline
in product sales occurring in our first quarter as overall product sales
declined by only $1.8 million during our second quarter, and increased $0.2
million during our third quarter, when compared to the prior year. The following
is a description of sales fluctuations in our CSBU channels for the three
quarters ended May 28, 2005:
|
§
|
Retail
Sales - The
decline in retail sales was primarily due to the impact of fewer
stores,
which totaled $7.7 million, and reduced technology and specialty
product
sales. Declining technology and specialty product sales were partially
offset by increased “core” product sales. Overall product sales trends
were reflected by a seven percent decline in year-to-date comparable
store
sales.
|
|
|
§
|
Consumer
Direct - Sales
through our consumer direct channels (catalog and eCommerce) were
generally consistent with the prior year and the slight decline was
primarily due to decreased technology and specialty product sales
compared
to the prior year.
|
|
|
§
|
Wholesale
Sales - Sales
through our wholesale channel, which includes sales to office superstores
and other retail chains, decreased primarily due to demand for these
products by these entities. In the previous fiscal year, we recognized
significant wholesale sales as we opened new wholesale channels and
sold
product to fill these new venues.
|
|
|
§
|
Other CSBU Sales - Other CSBU sales primarily consist of domestic external printing and publishing sales and building lease revenues. We have leased a substantial portion of our corporate campus in Salt Lake City, Utah and have recognized $0.6 million of lease revenue during fiscal 2005, which has been classified as other CSBU sales. During fiscal 2005, we have also made an effort to increase external printing sales in order to increase the utilization of our printing and publishing assets, which has improved printing and publishing sales compared to the prior year. |
Product
sales were also favorably affected by increased international catalog sales
and
increased retail and publishing sales in Japan, which increased $2.1 million
compared to the prior year. Although sales from these channels are recorded
in
the international segment of OSBU, sales from these OSBU channels are classified
as product sales in our condensed consolidated statements of
operations.
Training
and Consulting Services Sales - We
offer
a variety of training solutions, training related products, and consulting
services focused on productivity, leadership, strategy execution, sales force
performance, and effective communications training programs that are provided
both domestically and internationally through the OSBU. Our overall training
and
related consulting services sales increased by $11.8 million, or 17 percent,
compared to the same period of fiscal 2004. The improvement in training sales
was reflected in increased domestic program sales, which are delivered through
the OSG, as well as through our international operations. OSG sales performance
has improved in nearly all of our domestic sales regions and in our sales
performance group. We currently expect our domestic training and consulting
services sales to continue to strengthen through the remainder of fiscal 2005.
International sales improved primarily due to increased sales in Japan, the
United Kingdom, and Mexico, increased licensee royalty revenues, and the
translation of foreign sales amounts as foreign currencies strengthened against
the United States dollar. The favorable impact of currency translation on
reported international revenues totaled $1.4 million for the three quarters
ended May 28, 2005. These increases were partially offset by decreased sales
performance in Canada and Brazil.
Gross
Margin
Our
overall gross margin for the three quarters ended May 28, 2005 improved to
59.5
percent of sales, compared to 55.7 percent in the comparable period of fiscal
2004. The improvement in our overall gross margin was primarily due to increased
training and consulting sales as a percent of total sales, favorable product
mix
changes, and improved margins on our training and consulting service sales.
Training and consulting service sales, which typically have higher gross margins
than the majority of our product sales, increased to 38 percent of total sales
for the three quarters ended May 28, 2005 compared to 33 percent in the prior
year. Our gross margin on product sales improved to 54.0 percent compared to
51.1 percent in fiscal 2004 and was primarily due to a favorable shift in our
product mix as sales of higher-margin paper products and binders increased
as a
percent of total sales, while sales of lower-margin technology and specialty
products continue to decline. Additionally, the overall margin on paper and
binder sales has improved through focused cost reduction efforts, and improved
inventory management.
Training
and related consulting services gross margin, as a percent of sales of these
services, improved to 68.4 percent compared to 65.0 percent in the corresponding
period of fiscal 2004. The improvement in our training and services gross margin
was primarily due to a shift in training sales mix toward higher-margin
7
Habits
courses,
reduced costs for training materials, such as participant manuals and related
items, and overall lower costs associated with training sales.
Operating
Expenses
Selling,
General and Administrative - Our
SG&A expenses decreased $4.2 million, or four percent, compared to the prior
year. Total SG&A expenses as a percent of sales decreased to 50.8 percent
compared to 53.3 percent in the first three quarters of fiscal 2004. Declining
SG&A expenses were the direct result of initiatives specifically designed to
reduce our overall operating costs and is consistent with operating expense
trends during the previous two fiscal years. Our cost-reduction efforts have
included retail store closures, headcount reductions, consolidation of corporate
office space, and other measures designed to focus our resources on critical
activities and projects. These efforts were partially offset by increased
commission expenses related to increased training sales, severance costs
associated with a former executive officer, expenses related to changes in
the
CEO’s compensation, and additional costs associated with the preferred stock
recapitalization. The primary effects of our cost-cutting initiatives were
reflected in reduced rent and utilities expenses of $2.3 million, associate
expense reductions totaling $1.1 million, and reductions in other SG&A
expenses, such as outsourcing and development costs, that totaled $0.9 million
compared to the prior year.
We
regularly assess the operating performance of our retail stores, including
previous operating performance trends and projected future profitability. During
this assessment process, judgments are made as to whether under-performing
or
unprofitable stores should be closed. As a result of this evaluation process,
we
closed 23 stores during the three quarters ended May 28, 2005, closed 1
additional store subsequent to May 28, 2005, and may close additional retail
locations during the remainder fiscal 2005. The costs associated with closing
retail stores are typically comprised of charges related to vacating the
premises, which may include a provision for the remaining term on the lease,
and
severance and other personnel costs. These store closure costs totaled $0.8
million for the three quarters ended May 28, 2005 and were included as a
component of our SG&A expense. Based upon our continuing analyses of retail
store performance, we may close additional retail stores and may continue to
incur costs associated with closing these stores in future periods.
During
fiscal 1999, our Board of Directors approved a plan to restructure our
operations, which included an initiative to formally exit leased office space
located in Provo, Utah. We recorded a $16.3 million restructuring charge during
fiscal 1999 to record the expected costs of this restructuring plan, which
was
substantially completed during fiscal 2000. Subsequent to fiscal 2000, the
remaining accrued restructuring costs were primarily comprised of the estimated
remaining costs necessary to exit the leased office space. During the quarter
ended November 27, 2004, we exercised an option, available under our master
lease agreement, to purchase, and simultaneously sell, the office facility
to
the current tenant, an unrelated party. The negotiated purchase price with
the
landlord, a partnership in which the majority of the interests were owned by
a
Vice-Chairman of the Board of Directors and certain other employees and former
employees of the Company, was $14.0 million and the tenant agreed to purchase
the property for $12.5 million. These prices were within the range of estimated
fair values of the buildings as determined by an independent appraisal obtained
by the Company. We paid the difference between the sale and purchase prices,
plus other closing costs, which were included as a component of the
restructuring plan accrual. After accounting for the sale transaction, the
remaining fiscal 1999 accrued restructuring costs, which totaled $0.3
million, were reversed and recorded as a reduction to operating
expenses in the Company’s condensed consolidated statement of
operations.
Gain
on Disposal of Investment in Unconsolidated Subsidiary - During
fiscal 2003, we purchased an ownership interest in Agilix, for cash payments
totaling $1.0 million. Agilix is a development stage enterprise that develops
software applications, including the majority of our software applications
that
are available for sale to external customers. Although we continue to sell
software developed by Agilix, uncertainties in Agilix’s business plan developed
during our fiscal quarter ended March 1, 2003 and their potential adverse
effects on Agilix’s operations and future cash flows were significant. As a
result of this assessment, we determined that our ability to recover the
investment in Agilix was remote. Accordingly, we impaired and expensed our
remaining investment in Agilix of $0.9 million during the quarter ended March
1,
2003. During the quarter ended May 28, 2005, certain affiliates of Agilix
purchased the shares of capital stock held by us for $0.5 million in cash,
which
was reported as a gain on disposal of investment in unconsolidated
subsidiary.
Depreciation
and Amortization - Depreciation
expense decreased $3.0 million, or 32 percent, compared to fiscal 2004 primarily
due to the full depreciation or disposal of certain property and equipment
balances, primarily computer software and hardware, and the effects of
significantly reduced capital expenditures during preceding fiscal years. Based
upon these events and current capital spending trends, we expect that
depreciation expense will continue to decline compared to prior periods during
the remainder of fiscal 2005.
Amortization
expense on definite-lived intangible assets totaled $3.1 million for the three
quarters ended May 28, 2005 and May 29, 2004. We currently expect intangible
asset amortization expense to total $4.2 million in fiscal 2005.
Income
Taxes
For
the
three quarters ended May 28, 2005 we recorded an income tax benefit of $1.2
million, compared to an income tax provision of $1.0 million for the same period
of the prior year. The tax benefit for the three quarters ended May 28, 2005
resulted primarily from the resolution of various tax matters, which were
partially offset by income taxes incurred by our profitable foreign subsidiaries
and foreign income taxes on payments received from foreign licensees. The
increase in our income tax benefit was primarily due to the magnitude of income
tax issues resolved during fiscal 2005 compared to the matters resolved in
fiscal 2004. During both fiscal 2005 and fiscal 2004, we were unable to offset
our tax liabilities in foreign jurisdictions with its domestic operating loss
carryforwards. At May 28, 2005, given our significant history of operating
losses, we have provided a valuation allowance against substantially all of
our
domestic deferred income tax assets.
Loss
on Recapitalization of Preferred Stock
We
completed our preferred stock recapitalization during the quarter ended May
28,
2005. Refer to the discussion contained in the comparison of operating results
for the quarter ended May 28, 2005 compared to May 29, 2004 for further details
on this loss from recapitalization of our preferred stock.
LIQUIDITY
AND CAPITAL RESOURCES
Historically,
our primary sources of capital have been net cash provided by operating
activities, line-of-credit financing, long-term borrowings, asset sales, and
the
issuance of preferred and common stock. We currently rely primarily upon cash
flows from operating activities and cash on hand to maintain adequate liquidity
and working capital levels. At May 28, 2005 we had $45.5 million of cash, cash
equivalents, and short-term investments compared to $41.9 million at August
31,
2004. Our net working capital (current assets less current liabilities)
increased to $47.9 million at May 28, 2005 compared to $33.8 million at August
31, 2004. The following discussion is a description of the primary factors
affecting our cash flows and their effects upon our liquidity and capital
resources during the three quarters ended May 28, 2005.
Cash
Flows From Operating Activities
During
the three quarters ended May 28, 2005, our net cash provided by operating
activities increased to $12.0 million compared to $2.1 million for the same
period of the prior year. Our primary source of cash from operating activities
was the sale of goods and services to our customers in the normal course of
business. We also received $1.7 million in cash during the quarter ended May
28,
2005 from a legal settlement rendered in our favor. However, subsequent to
receiving the payment for this legal settlement, the case was appealed.
Consequently, we recorded an accrued liability for the cash received and will
recognize the income from the settlement upon final resolution of the matter.
Our primary uses of cash for operating activities are payments to suppliers
for
materials used in products sold, payments for direct costs necessary to conduct
training programs, and payments for selling, general, and administrative
expenses. During the three quarters ended May 28, 2005, one of our significant
uses of cash for operating activities consisted of payments made to vendors
and
suppliers related to inventory purchases for our seasonally busy months of
November, December, and January. We also used cash from operations to finance
an
increase in our accounts receivable, which increased due to the timing of
wholesale sales, which occurred in the fourth quarter of the prior year, and
from increased training sales, which are generally made on credit terms. Our
overall cash flows from operating activities improved due to increased sales,
improved margins on sales, and lower operating costs than in the previous
year.
We
believe that our efforts to increase sales, combined with existing and planned
cost-cutting initiatives, and efforts to maintain optimal working capital
balances, will improve our cash flows from operating activities in future
periods. However, the success of these efforts is dependent upon numerous
factors, many of which are not within our control.
Cash
Flows From Investing Activities and Capital
Expenditures
Net
cash
provided by investing activities totaled $8.6 million for the three quarters
ended May 28, 2005. Our primary sources of investing cash were the sale of
auction-rate securities that were held as marketable securities and the proceeds
received from the sale of our investment in an unconsolidated subsidiary. These
proceeds were partially offset by the purchase of short-term marketable
securities and the purchase of $2.7 million of property and equipment, which
consisted primarily of tenant improvements on leased areas of our corporate
campus, computer hardware, software, and leasehold improvements in certain
of
our retail stores.
Subsequent
to May 28, 2005, we completed the sale and associated leaseback of our corporate
headquarters facility, located in Salt Lake City, Utah. In connection with
the
sale, we entered into a 20-year master lease agreement with the purchaser.
Under
the terms of the agreement, we have six five-year options to renew the master
lease agreement and we could therefore maintain our operations at our current
location for the next 50 years. Our net proceeds from the sale, after
transaction costs, were $32.4 million.
Cash
Flows From Financing Activities
Net
cash
used for financing activities during the three quarters ended May 28, 2005
totaled $5.8 million. Our primary use of cash for financing activities was
the
payment of accrued Series A preferred stock dividends, which totaled $6.6
million during fiscal 2005. The Company also received $0.8 million in cash,
which represented payment in full, from an officer and members of the Board
of
Directors that were required to repay their management common stock loans on
March 30, 2005.
Subsequent
to May 28, 2005, we used $30.0 million from the proceeds of the sale of our
corporate headquarters facility to redeem 1.2 million shares of Series A
preferred stock under terms of our recently approved recapitalization plan.
This
preferred stock redemption will reduce our cash required to pay preferred stock
dividends by $3.0 million per year in future periods. We may also redeem
additional shares of preferred stock under the terms of the recapitalization
plan in the near future.
Contractual
Obligations
The
Company has not structured any special purpose or variable interest entities,
or
participated in any commodity trading activities, which would expose us to
potential undisclosed liabilities or create adverse consequences to our
liquidity. Required contractual payments primarily consist of payments to EDS
for outsourcing services related to information systems, warehousing and
distribution, and call center operations; minimum rent payments for retail
store
and sales office space; cash payments for Series A preferred stock dividends;
monitoring fees paid to a Series A preferred stock investor; and mortgage
payments on certain buildings and property. There have been no significant
changes to our expected required contractual obligations for these obligations
from amounts disclosed at August 31, 2004. However, following completion of
the
sale of our corporate headquarters facility, we now have a long-term lease
obligation that totals approximately $3.0 million per year for the first five
years of the contract with two percent annual increases thereafter.
Other
Items
Management
Common Stock Loan Program - The
Company is the creditor for a loan program that provided the capital to allow
certain management personnel the opportunity to purchase shares of our common
stock. In May 2004, our Board of Directors approved modifications to the terms
of the management stock loans. While these changes had significant implications
for most management stock loan program participants, the Company did not
formally amend or modify the stock loan program notes. Rather, the Company
is
foregoing certain of its rights under the terms of the loans in order to
potentially improve the participant’s ability to pay, and the Company’s ability
to collect, the outstanding balances of the loans. Based upon guidance found
in
EITF Issue 00-23, Issues
Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation No. 44,
and
EITF Issue 95-16, Accounting
for Stock Compensation Agreements with Employer Loan Features under APB Opinion
No. 25,
we
determined that the management common stock loans should be accounted for as
non-recourse stock compensation instruments due to the modifications approved
in
May 2004 and their effects to the Company and the loan participants. While
this
accounting treatment does not alter the legal rights associated with the loans
to the employees, the modifications to the terms of the loans were deemed
significant enough to adopt the non-recourse accounting model as described
in
EITF 00-23. As a result of this accounting treatment, the remaining carrying
value of the notes and interest receivable related to financing common stock
purchases by related parties, which totaled $7.6 million prior to the loan
term
modifications, was reduced to zero with a corresponding reduction in additional
paid-in capital.
We
currently account for the management common stock loans as variable stock option
arrangements. Compensation expense will be recognized when the fair value of
the
common stock held by the loan participants exceeds the contractual principal
and
accrued interest on the loans (approximately $47.8 million at May 28, 2005)
or
the Company takes action on the loans that in effect constitutes a repricing
of
an option. This accounting treatment also precludes us from reversing the
amounts expensed as additions to the loan loss reserve, totaling $29.7 million,
which were recognized in prior periods. As a result of these loan program
modifications, the Company hopes to increase the total value received from
loan
participants; however, our inability to collect all, or a portion, of these
receivables would have an adverse impact upon our financial position and future
cash flows compared to full collection of the loans. During the quarter ended
May 28, 2005, we collected $0.8 million, which represented payment in full,
from
an officer and members of the Board of Directors that were required to repay
their loans on March 30, 2005. Also during the quarter, the Board of Directors
approved loan modifications for a former executive officer and a former director
substantially similar to loan modifications previously granted to other loan
participants in the management stock loan program described above.
Availability
of Future Capital Resources - Going
forward, we will continue to incur costs necessary for the operation of the
business. We anticipate using cash on hand, cash provided by operating
activities, on the condition that we can continue to generate positive cash
flows from operations, and other financing alternatives, if necessary, for
these
expenditures. We anticipate that our existing capital resources will be adequate
to enable us to maintain our operations for at least the upcoming twelve months.
Our ability to maintain adequate capital for future operations is dependent
upon
a number of factors, including sales trends, our ability to contain costs,
levels of capital expenditures, collection of accounts receivable, and other
factors. Some of the factors that influence our operations are not within our
control, such as economic conditions and the introduction of new technology
and
products by our competitors. We will continue to monitor our liquidity position
and may pursue additional financing alternatives, if required, to maintain
sufficient resources for future operating and capital requirements. However,
there can be no assurance such financing alternatives will be available to
us on
acceptable terms.
USE
OF ESTIMATES AND CRITICAL ACCOUNTING
POLICIES
Our
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America. The significant
accounting polices that we used to prepare our consolidated financial statements
are outlined in Note 1 to the consolidated financial statements, which are
presented in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal
year ended August 31, 2004. Some of those accounting policies require us to
make
estimates and assumptions that affect the amounts reported in our consolidated
financial statements. Management regularly evaluates its estimates and
assumptions and bases those estimates and assumptions on historical experience,
factors that are believed to be reasonable under the circumstances, and
requirements under accounting principles generally accepted in the United States
of America. Actual results may differ from these estimates under different
assumptions or conditions, including changes in economic conditions and other
circumstances that are not in our control, but which may have an impact on
these
estimates and our actual financial results.
The
following items require the most significant judgment and often involve complex
estimates:
Revenue
Recognition
We
derive
revenues primarily from the following sources:
|
§
|
Products
- We sell planners, binders, planner accessories, printed
materials, handheld electronic devices, and other technology related
products that are primarily sold through our CSBU channels.
|
|
|
§
|
Training and Services - We provide training and consulting services to both organizations and individuals in strategic execution, leadership, productivity, goal alignment, sales force performance, and communication effectiveness skills. These training programs and services are primarily sold through our OSBU channels. |
The
Company recognizes revenue when: 1) persuasive evidence of an agreement exists,
2) delivery of product has occurred or services have been rendered, 3) the
price
to the customer is fixed and determinable, and 4) collectibility is reasonably
assured. For product sales, these conditions are generally met upon shipment
of
the product to the customer or by completion of the sale transaction in a retail
store. For training and service sales, these conditions are generally met upon
presentation of the training seminar or delivery of the consulting
services.
Some
of
our training and consulting contracts contain multiple deliverable elements
that
include training along with other products and services. In accordance with
EITF
Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables,
sales
arrangements with multiple deliverables are divided into separate units of
accounting if the deliverables in the sales contract meet the following
criteria: 1) the delivered training or product has value to the client on a
standalone basis; 2) there is objective and reliable evidence of the fair value
of undelivered items; and 3) delivery of any undelivered item is probable.
The
overall contract consideration is allocated among the separate units of
accounting based upon their fair values. If the fair value of all undelivered
elements exists, but fair value does not exist for one or more delivered
elements, the residual method is used. Under the residual method, the amount
of
consideration allocated to the delivered items equals the total contract
consideration less the aggregate fair value of the undelivered items. Fair
value
of the undelivered items is based upon the normal pricing practices for the
Company’s existing training programs, consulting services, and other products,
which are generally the prices of the items when sold separately.
Revenue
is recognized on software sales in accordance with Statement of Position (SOP)
97-2, Software
Revenue Recognition
as
amended by SOP 98-09. SOP 97-2, as amended, generally requires revenue earned
on
software arrangements involving multiple elements such as software products
and
support to be allocated to each element based the relative fair value of the
elements based on vendor specific objective evidence (VSOE). The majority of
the
Company’s software sales have multiple elements, including a license and post
contract customer support (PCS). Currently we do not have VSOE for either the
license or support elements of its software sales. Accordingly, revenue is
deferred until the only undelivered element is PCS and the total arrangement
fee
is recognized ratably over the support period.
Revenue
is recognized as the net amount to be received after deducting estimated amounts
for discounts and product returns.
Accounts
Receivable Valuation
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our best estimate
of
the amount of probable credit losses in the existing accounts receivable
balance. We determine the allowance for doubtful accounts based upon historical
write-off experience and current economic conditions and we review the adequacy
of our allowance for doubtful accounts on a regular basis. Receivable balances
past due over 90 days, which exceed a specified dollar amount, are reviewed
individually for collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the probability
for recovery is considered remote. We do not have any off-balance sheet credit
exposure related to our customers.
Inventory
Valuation
Inventories
are stated at the lower of cost or market with cost determined using the
first-in, first-out method. Our inventories are comprised primarily of dated
calendar products and other non-dated products such as binders, handheld
electronic devices, stationery, training products, and other accessories.
Provision is made to reduce excess and obsolete inventories to their estimated
net realizable value. In assessing the realization of inventories, we make
judgments regarding future demand requirements and compare these assessments
with current and committed inventory levels. Inventory requirements may change
based on projected customer demand, technological and product life cycle
changes, longer or shorter than expected usage periods, and other factors that
could affect the valuation of our inventories.
Indefinite-Lived
Intangible Assets
Intangible
assets that are deemed to have an indefinite life are not amortized, but rather
are tested for impairment on an annual basis, or more often if events or
circumstances indicate that a potential impairment exists. The Covey trade
name
intangible asset has been deemed to have an indefinite life. This intangible
asset is assigned to the Organizational Solutions Business Unit and is tested
for impairment using the present value of estimated royalties on trade name
related revenues, which consist primarily of training seminars, international
licensee royalties, and related products. If forecasts and assumptions used
to
support the realizability of our indefinite-lived intangible asset change in
the
future, significant impairment charges could result that would adversely affect
our results of operations and financial condition.
Impairment
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We use an estimate of
undiscounted future net cash flows of the assets over the remaining useful
lives
in determining whether the carrying value of the assets is recoverable. If
the
carrying values of the assets exceed the anticipated future cash flows of the
assets, we recognize an impairment loss equal to the difference between the
carrying values of the assets and their estimated fair values. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent from other groups of assets. The
evaluation of long-lived assets requires us to use estimates of future cash
flows. If forecasts and assumptions used to support the realizability of our
long-lived tangible and definite-lived intangible assets change in the future,
significant impairment charges could result that would adversely affect our
results of operations and financial condition.
Income
Taxes
The
calculation of our income tax provision or benefit, as applicable, requires
estimates of future taxable income or losses. During the course of the fiscal
year, these estimates are compared to actual financial results and adjustments
may be made to our tax provision or benefit to reflect these revised
estimates.
Our
history of significant operating losses precludes us from demonstrating that
it
is more likely than not that the related benefits from deferred income tax
deductions and foreign tax carryforwards will be realized. Accordingly, we
recorded valuation allowances on our deferred income tax assets. These valuation
allowances are based on estimates of future taxable income or losses that may
or
may not be realized.
NEW
ACCOUNTING
PRONOUNCEMENTS
In
December 2004, the Financial Accounting Standards Board (FASB) approved
Statement No. 123R, Share-Based
Payment.
Statement 123R sets accounting requirements for “share-based” compensation to
employees, including employee stock purchase plans, and requires companies
to
recognize in the income statement the grant-date fair value of stock options
and
other equity-based compensation. We currently account for our stock-based
compensation using the intrinsic method as defined in Accounting Principles
Board (APB) Opinion No. 25 and accordingly, we have not recognized any expense
for our stock option plans or employee stock purchase plan in our consolidated
financial statements. Currently, we provide disclosures about the pro forma
compensation expense from stock based awards, which is based upon a
Black-Scholes option pricing model. Although Statement 123R does not express
a
preference for a type of valuation model, we intend to reexamine our valuation
methodology and the corresponding support for the assumptions that underlie
the
valuation of stock-based awards prior to our adoption of Statement 123R. This
statement is effective for interim or annual periods beginning after June 15,
2005, and will thus be effective for our first quarter of fiscal 2006. Upon
adoption, we intend to use the modified prospective transition method. Under
this method, awards that are granted, modified, or settled after the date of
adoption will be measured and accounted for in accordance with Statement 123R.
Unvested equity-classified awards that were granted prior to the effective
date
will continue to be accounted for in accordance with Statement 123, except
that
compensation expense amounts will be recognized in the income statement. We
are
currently in the process of further analyzing this new pronouncement and have
not yet determined the impact on our financial statements.
In
November 2004, the FASB approved Statement No. 151, Inventory
Costs an Amendment of ARB No. 43, Chapter 4.
Statement No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) and requires
that those items be recognized as a current period expense regardless of whether
they meet the criteria of “so abnormal.” This statement is effective for interim
or annual periods beginning after June 15, 2005 and will thus be effective
for
our first quarter of fiscal 2006. We are currently in the process of analyzing
the accounting requirements under this new pronouncement and have not yet
determined its impact on our financial statements.
ITEM
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET
RISK OF FINANCIAL INSTRUMENTS
The
primary financial instrument risks to which the Company is exposed are
fluctuations in foreign currency exchange rates and interest rates. To manage
risks associated with foreign currency exchange and interest rates, we make
limited use of derivative financial instruments. Derivatives are financial
instruments that derive their value from one or more underlying financial
instruments. As a matter of policy, our derivative instruments are entered
into
for periods consistent with the related underlying exposures and do not
constitute positions that are independent of those exposures. In addition,
we do
not enter into derivative contracts for trading or speculative purposes, nor
are
we party to any leveraged derivative instrument. The notional amounts of
derivatives do not represent actual amounts exchanged by the parties to the
instrument, and, thus, are not a measure of exposure to us through our use
of
derivatives. Additionally, we enter into derivative agreements only with highly
rated counterparties and we do not expect to incur any losses resulting from
non-performance by other parties.
Foreign
Currency Sensitivity
Due
to
the global nature of the Company’s operations, we are subject to risks
associated with transactions that are denominated in currencies other than
the
United States dollar, which creates exposure to foreign currency exchange risk.
The objective of our foreign currency risk management activities is to reduce
foreign currency risk in the consolidated financial statements. In order to
manage foreign currency risks, we make limited use of foreign currency forward
contracts and other foreign currency related derivative instruments. Although
we
cannot eliminate all aspects of our foreign currency risk, we believe that
our
strategy, which includes the use of derivative instruments, can reduce the
impacts of foreign currency related issues on our consolidated financial
statements.
During
the quarter and three quarters ended May 28, 2005, we utilized foreign currency
forward contracts to manage the volatility of certain intercompany financing
transactions and other transactions that are denominated in foreign currencies.
Because these contracts do not meet specific hedge accounting requirements,
gains and losses on these contracts, which expire on a quarterly basis, are
recognized currently and are used to offset a portion of the gains or losses
of
the related accounts. The gains and losses on these contracts were recorded
as a
component of SG&A expense in the Company’s consolidated statements of
operations and resulted in the following net gains or losses for the periods
indicated (in thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
|
Losses
on foreign exchange
contracts
|
$
|
(31
|
)
|
$
|
-
|
$
|
(384
|
)
|
$
|
(539
|
)
|
||
|
Gains
on foreign exchange
contracts
|
53
|
203
|
56
|
227
|
|||||||||
|
Net
gain (loss) on foreign
exchange
contracts
|
$
|
22
|
$
|
203
|
$
|
(328
|
)
|
$
|
(312
|
)
|
|||
At
May
28, 2005, the fair value of these contracts, which was determined using the
estimated amount at which contracts could be settled based upon forward market
exchange rates, was insignificant. The notional amounts of our foreign currency
sell contracts that did not qualify for hedge accounting were as follows at
May
28, 2005 (in thousands):
|
Contract
Description
|
Notional
Amount in Foreign Currency
|
Notional
Amount in U.S. Dollars
|
|||||
|
Japanese
Yen
|
325,000
|
$
|
3,011
|
||||
|
Australian
Dollars
|
1,824
|
1,372
|
|||||
|
Mexican
Pesos
|
9,400
|
844
|
|||||
During
the three quarters ended May 28, 2005, we also entered into foreign currency
forward contracts that were designed to manage foreign currency risks related
to
the value of our net investment in foreign operations located in Canada, Japan,
and the United Kingdom. These three offices comprise the majority of our net
investment in foreign operations. These foreign currency forward instruments,
which expire on a monthly basis, qualified for hedge accounting and
corresponding gains and losses were recorded as a component of other
comprehensive income in the Company’s consolidated balance sheet. The gains and
losses on these contracts were as follows for the periods presented (in
thousands):
|
Quarter
Ended
|
Three
Quarters Ended
|
||||||||||||
|
May
28,
2005
|
May
29,
2004
|
May
28,
2005
|
May
29,
2004
|
||||||||||
|
Losses
on net investment
hedge
contracts
|
$
|
-
|
$
|
(132
|
)
|
$
|
(384
|
)
|
$
|
(132
|
)
|
||
|
Gains
on net investment
hedge
contracts
|
-
|
70
|
66
|
70
|
|||||||||
|
Net
loss on net investment
hedge
contracts
|
$
|
-
|
$
|
(62
|
)
|
$
|
(318
|
)
|
$
|
(62
|
)
|
||
As
of May
28, 2005, the Company had settled its net investment hedge contracts and did
not
utilize such contracts during the quarter then ended. However, the Company
may
utilize net investment hedge contracts in future periods as a component of
its
overall foreign currency risk strategy.
Interest
Rate Sensitivity
The
Company is exposed to fluctuations in U.S. interest rates primarily as a result
of the cash and cash equivalents that we hold. Following payment and termination
of our line of credit facility during fiscal 2002, our remaining debt balances
consist primarily of long-term mortgages on certain of our buildings and
property. As such, the Company does not have significant exposure or additional
liability due to interest rate sensitivity and we were not party to any interest
rate swap or other interest related derivative instrument during the quarter
or
three quarters ended May 28, 2005 or May 29, 2004.
ITEM
4.
CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange
Act
of 1934, as amended (the Exchange Act), is recorded, processed, summarized,
and
reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
As
required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the
foregoing, it was determined that our internal controls over revenue recognition
for certain complex, multiple-element contracts in our OSBU were improving,
but
still deficient.
This
deficiency in our internal controls related to improper recognition of revenue
from certain complex multiple element contracts and included ineffective
controls to monitor compliance with existing policies and procedures and
insufficient training of accounting personnel on complex accounting standards
related to multiple element contracts in the OSBU. The improper revenue
recognition was detected in the review process and correcting adjustments were
recorded to properly state our revenues and was disclosed to the Audit Committee
and to our auditors. We are in the process of improving our internal controls
over financial reporting regarding these complex multiple-element contracts
in
an effort to remediate this deficiency. Thus far we have made personnel changes,
provided additional training on complex revenue recognition principles for
our
accounting staff, improved monitoring controls, and established additional
policies and procedures related to revenue recognition. We believe that these
control changes have improved our revenue recognition procedures and reduced
the
risk of material misstatement of our revenues.
During
the quarter ended May 28, 2005 we have made improvements to our financial
reporting controls, including the implementation of additional monitoring
controls, which we believe will provide additional assurance to our reported
financial statements and disclosures. Other than these changes, there have
been
no internal control changes that would have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. In addition, other than as described above, since the most recent
evaluation date, there have been no significant changes in our internal control
structure, policies, and procedures or in other areas that could significantly
affect our internal control over financial reporting.
On
March
2, 2005, the SEC extended the compliance dates for non-accelerated filers and
foreign private issuers pursuant to Section 404 of the Sarbanes-Oxley Act.
Under
this extension, a company that is not required to file its annual and quarterly
reports on an accelerated basis (non-accelerated filer), must begin to comply
with the internal control over financial reporting requirements for its first
fiscal year ending on or after July 15, 2006. This action constitutes a one-year
extension from the previously established July 15, 2005 compliance date. We
are
currently in the process of documenting our internal control structure and
we
intend to use the additional time to improve the quality of our documentation
and testing.
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Certain
written and oral statements made by the Company or our representatives in this
report, other reports, filings with the Securities and Exchange Commission,
press releases, conferences, Internet webcasts, or otherwise, are
“forward-looking statements” within the meaning of the Private Securities
Litigation reform Act of 1995 and Section 21E of the Securities Exchange Act
of
1934. Forward-looking statements include, without limitation, any statement
that
may predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain words such as
“believe,”“anticipate,”“expect,”“estimate,”“project,” or words or phrases of
similar meaning. Forward-looking statements are subject to certain risks and
uncertainties that may cause actual results to differ materially from the
forward-looking statements. These risks and uncertainties are disclosed from
time to time in reports filed by us with the SEC, including reports on Forms
8-K, 10-Q, and 10-K. Such risks and uncertainties include, but are not limited
to, the matters discussed under Business Environment and Risk in our annual
report on Form 10-K for the fiscal year ended August 31, 2004. In addition,
such
risks and uncertainties may include unanticipated developments in any one or
more of the following areas: continuing demand for our products and services,
which depends to some extent on general economic conditions, so that we can
avoid future declines in revenues; the ability of our products and services
to
successfully compete with alternative solutions and the products and services
offered by others; unanticipated costs or capital expenditures; cost savings
from the outsourcing of our information systems and controls, including without
limitation, the systems related to demand and supply planning, inventory
control, and order fulfillment; delays or unanticipated outcomes relating to
the
Company’s strategic plans; dependence on existing products or services; the rate
and consumer acceptance of new product introductions; the number and nature
of
customers and their product orders, including changes in the timing or mix
of
product or training orders; pricing of our products and services and those
of
competitors; adverse publicity; and other factors which may adversely affect
our
business.
The
risks
included here are not exhaustive. Other sections of this report may include
additional factors that could adversely affect our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors may emerge and it is not possible for our
management to predict all such risk factors, nor can we assess the impact of
all
such risk factors on our business or the extent to which any single factor,
or
combination of factors, may cause actual results to differ materially from
those
contained in forward-looking statements. Given these risks and uncertainties,
investors should not rely on forward-looking statements as a prediction of
actual results.
The
market price of our common stock has been and may remain volatile. Factors
such
as quarter-to-quarter variations in revenues and earnings or losses or our
failure to meet expectations could have a significant impact on the market
price
of our common stock. In addition, the price of our common stock can change
for
reasons unrelated to our performance. Due to our low market capitalization
and
share price, the price of our common stock may also be affected by conditions
such as a lack of analyst coverage and fewer potential investors.
Forward-looking
statements are based on management’s expectations as of the date made, and the
Company does not undertake any responsibility to update any of these statements
in the future. Actual future performance and results will differ and may differ
materially from that contained in or suggested by forward-looking statements
as
a result of the factors set forth in this Management’s Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in our filings
with the SEC.
PART
II.
OTHER INFORMATION
Item
1. Legal
Proceedings:
During
fiscal 2002, the Company received a subpoena from the Securities and Exchange
Commission (SEC) seeking documents and information relating to the Company’s
management stock loan program and previously announced, and withdrawn, tender
offer. The Company has provided the documents and information requested by
the
SEC, including the testimonies of its Chief Executive Officer, Chief Financial
Officer, and other key employees. The Company has cooperated, and will continue
to fully cooperate, in providing requested information to the SEC. The SEC
and
the Company are currently engaged in discussions with respect to a potential
resolution of this matter.
In
fiscal
2002, the Company brought legal action against World Marketing Alliance, Inc.,
a
Georgia corporation (WMA) and World Financial Group, Inc., a Delaware
corporation and the purchaser of substantially all assets of WMA, for breach
of
contract. The case proceeded to jury trial commencing October 25, 2004. The
jury
rendered a verdict in the Company’s favor and against WMA on November 1, 2004
for the entire unpaid contract amount of approximately $1.1 million. In addition
to the verdict, the Company recovered legal fees totaling $0.3 million and
pre-
and post-judgment interest of $0.3 million from WMA. The Company received
payment in cash for the legal settlement during the quarter ended May 28, 2005.
However, shortly after paying the legal settlement, WMA appealed the jury
decision to the 10th
Circuit
Court of Appeals.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds:
The
Company did not purchase any shares of its common stock during the quarter
ended
May 28, 2005.
In
previous fiscal years, the Company’s Board of Directors had approved various
plans for the purchase of up to 8,000,000 shares of our common stock. As of
November 25, 2000, the Company had purchased 7,705,000 shares of common stock
under these board-authorized purchase plans. On December 1, 2000, the Board
of
Directors approved an additional plan to acquire up to $8.0 million of our
common stock. To date, we have purchased $7.1 million of our common stock under
the terms of the December 2000 Board approved purchase plan. The maximum number
of shares that may yet be purchased under the plans, which totaled approximately
437,000, was calculated for the December 2000 plan by dividing the remaining
approved dollars by $6.43, which was the closing price of the Company’s common
stock on May 27, 2005 (last trading day of fiscal quarter). These shares were
added to the remaining shares from the Company’s other Board-approved plans to
arrive at an approximate maximum number of shares that may be purchased as
of
May 28, 2005. No shares of the Company’s common stock were purchased during the
fiscal quarter ended May 28, 2005 under terms of any Board authorized purchase
plan.
Item
6. Exhibits
|
(A)
|
Exhibits: |
|
31
|
Certification
of the CEO and CFO under Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32
|
Certification
of the CEO and CFO under Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
| 10.1 |
Separation
Agreement between the Company and Val J. Christensen, dated March
29, 2005
(filed as Exhibit 99.1 in the Company's Current report on Form 8-K
filed
with the Commission on April 4, 2005 and incorporated herein by
reference).
|
|
| 10.2 |
Legal
Services Agreement between the Company and Val J. Christense,
dated March 29, 2005 (filed as Exhibit 99.2 in the Company's
current
Report on Form 8-K filed with the Commission on April 4, 2005 and
incorporated herein by reference).
|
|
| 10.3 |
Master
Lease Agreement between Franklin SaltLake LLC (Landlord) and Franklin
Development Corporation (Tenant) (filed as Exhibit 99.1 in the Company's
Current Report on Form 8-K filed with the Commission on June 27,
2005 and
incorporated herein by reference).
|
|
| 10.4 | Purchase and Sale Agreement and Escrow Instructions between Levy Affiliated Holdings, LLC (Buyer) and Franklin Development Corporation (Seller) and Amendments (filed as Exhibit 99.2 in the Company's Current Report on Form 8-K filed with the Commission on June 27, 2005 and incorporated herein by reference). |
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| FRANKLIN COVEY CO. | ||
| |
|
|
| Date: July 12, 2005 | By: | /s/ ROBERT A. WHITMAN |
|
Robert A. Whitman |
||
| Chief Executive Officer | ||
| |
|
|
| Date: July 12, 2005 | By: | /s/ STEPHEN D. YOUNG |
|
Stephen D. Young |
||
| Chief Financial Officer | ||